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. . . . . . . . .
Nancy [email protected]
Competition Issues in theCivil Aviation Sector
Evaluating Competition related
issues pertaining to the Indian Airlines Industry, with Special
Reference to M&A in light of
Competition Act, 20021
1 Prepared in fulfillment of the requirement as part of Economics, M.A in Gokhale Institute of Politics & Economics.
A study paper submitted for Internship June-July, 2007 toCompetition Commission of India (CCI).
Competition Commission of
India (CCI)
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DISCLAIMER
This project report/dissertation has been prepared by the author as an internunder the Internship Programme of the Competition Commission of India foracademic purposes only. The views expressed in the report are personal to theintern and do not necessarily reflect the view of the Commission or any of itsstaff or personnel and do not bind the Commission in any manner. This reportis the intellectual property of the Competition Commission of India and thesame or any part thereof may not be used in any manner whatsoever, without
express permission of the Competition Commission of India in writing.
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Table of Contents
Part I: Introduction....10
Part II: Drivers to Growth.15
Part III: Types of Air Services..17
Part IV: Players of the Industry.................................................................................................18
Part V: Importance of Competition...........22
Part VI : Relevant Market Concept...........27
Part VII : Competition related issues pertaining to the Aviation Sector....31
a. Loyalty Programs ( FFPs & Travel Agent Programs)........... 31
b. Multi Contact.............................................34
c. Competition in Vertically Related Markets. ........34
d. Price Transparency & Collusion..........36
e. Alliances & Competition related issues with them...........37
Part VIII: Airlines M&A:
a. Regulations governing M&A in India...........48
b. Cases of M&A Abroad.............53
i. Air France & KLM
ii. US Airways & United Airlines
c. Cases of M&A in India..........58
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i. Jet-Air Sahara Merger
ii. Indian Airlines Air India Merger
iii. KingfisherAir Deccan Merger
Part IX : Competition Related Issues Pertaining to the Indian Aviation Sector
a. Regulatory Barriers......59
b. Scarcity of Slots...65
c. Cartelization.....73
d. Regulation of Combinations.....86
Part X: Conclusion.....101
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ACKNOWLEGMENT:
I want to express my sincere thanks to Member, CCI, Mr. Vinod Dhall and
my guide Mr. Peter Augustine, Economic Advisor, CCI for having given mean opportunity to work on the topic of my choice, The Aviation Sector.
Im indebted to the Member for giving me an opportunity to work in his
esteemed organization. I take this opportunity to thank Mr. Peter Augustine
for guiding me during this study right from the beginning and providing me
constructive suggestions throughout the preparation of the dissertations.
Im highly thankful to our Librarian, Mr. G. Sreeniwas for his
resourcefulness. I would also like to thank ASSOCHAM for giving me access
to their Study Report-Road Map to Civil Aviation. I would also like to
take the opportunity to thank, Dr. Anil Kumar, Assistant Director,
(Research) for making my stay at CCI so comfortable.
Last but not the least, I would like to thank my Family without whose
support and inspiration, this project would have been possible.
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LIST OF FIGURES
Number
Fig 1: Market Share of Domestic Carriers..20
Fig 2: Level of Congestion at major city airports...65
Fig 3: Distribution of flights operating everyday between Delhi to Mumbai.66
Fig 4: Indicative growth rates of passenger, airports & aircrafts....81
Fig 5: Comparison of Revenue per Aircraft of the Domestic carriers with the Global
Standards...107
Fig 6: Traffic on International Routes.63
LIST OF TABLES:
Table 1: HHI Calculations...76
Table 2: Combined Turnovers of the Merged Carriers...85
Table 3: Comparison of Market shares Pre & Post Mergers....96
Table 4: Current & Fleet on Order Status of Domestic Carriers...106
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EXECUTIVE SUMMARY
Civil Aviation plays an integral role in development of an economy. It helps in realizing
the socio-economic objective of providing connectivity to foster travel & trade. As per
International Civil Aviation Organizations estimates, every 100 $ spent on air travel
produces benefits worth 325 $ to the Economy.
The Indian Aviation Sector has witnessed tremendous growth in the recent past which is
driven by sound demographic, macroeconomic, government aided reforms & market
dynamics. The three fold increase in consumerism, rising disposable income; booming
aviation sector; burgeoning middle class; increasing business travel; government reforms;
entry of low cost carriers; increasing competition etc have positioned the Indian Aviation
Sector in a high growth trajectory.
In order to maintain this high growth trajectory, it is very important that competitive
forces must continue to operate with in this sector. In this report my focus shall be on the
competition related issues surrounding Airlines with special emphasis on M&A in light
of Competition Act, 2002.
There are some characteristics inherent to this sector that are anti-competitive in nature.
For Instance Loyalty Programs like Frequent Flier Programs & Travel Agent Incentive
Schemes. Airlines use the above-mentioned loyalty programs to distinguish between
business travelers & those traveling for leisure purposes. The ones traveling for Business
Purposes have a high opportunity cost of time & therefore have a very inelastic response
w.r.t. changes in prices vis--vis Leisure Travelers who are flexible about the days &
timings & hence they benefit from a wide choice of routes available & also a higher level
of competition. All Competitive concerns addressed in this report are focused on the time
sensitive passengers as they have no other substitute mode of transport that matches the
speed of air travel. Hence, the relevant market for our analysis is defined as a City Pair
Market at a particular time on a particular day.
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Unlike other industries, capacity in the aviation sector cannot be immediately augmented
in face of rising demand. Airports have a capacity constraint binding on them in terms of
the landing, take off facilities, air traffic controllers, refueling, maintenance, clearing &
catering services etc. It is this capacity constraint that might act as an entry barrier for
new entrants. Landing & take off rights are referred to as Slots. These slots are an
important consideration for an entrant as peak timed slots register higher passenger load
factors as compared to the oddly timed slots. With most of the countrys trunk route
airports hitting their capacity mark, only oddly timed slots may be available at major
metropolitan city airports to a new entrant which discourages new entry.
There are some regulatory barriers inherent in our domestic air transport policy which
may constrain new entry & have anti-competitive effects. While the regulations
governing minimum fleet size , minimum equity requirements , route dispersal guidelines
to the domestic operations are act as an entry barriers; the regulations governing
minimum fleet & experience requirements for International Operations & exclusive right
to National carriers to fly to Gulf Routes etc are highly discriminative & are constraining
new entry & strengthening the incumbents position. The current regulations seem to
favor only the incumbents namely Air India-Indian Airlines and Jet-Sahara. None of the
other players are allowed to operate internationally. Given that maximum passenger load
factor is registered on Gulf Routes, the exclusive right given to the national carriers is
highly a restrictive practice.
The Year-2007 has been the year of M&A in the Indian Skies. First, it was Indian
Airlines & Air India then Jet & Air Sahara and last but the least to tie the knot was
Kingfisher & Air Deccan. The industry sources favored these mergers as they believed
that these mergers would benefit the already bleeding Industry. It would help to bring in
some route; network & fleet rationalization. The merged entities are expected to benefit
from joint operations & would share synergies of joint operations. However, equally
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justified are the consumers groups who are fearing that post consolidation, prices may
increase more so after the consummation of Air Deccan.
All three M&A very well come under the lens of the Competition Commission of Indias
as they meet the benchmarks standards laid down by the Competition Act, 2002 with
regard to Regulations of M&A. As far as IA-AI Merger is concerned it doesnt pose
much problem from competition angle as the merging entities have complementary
networks with AI having International presence with negligible domestic presence and IA
having heavy domestic presence with negligible international presence. However, the
exclusive right to fly to Gulf routes is unfair as its depriving the other domestic players
from an important source of revenue. Consumers too dont have much option w.r.t. mode
of transportation & the choice of the carrier.
With the take over of Sahara by Jet, some important issues over competitive concerns
need to be addressed. Jet and Sahara have peak slots available on all major metropolitan
airports at peak timings. As defined earlier that relevant market in our analysis is a city
pair market, on a particular day, at a particular time. Hence peak timed slots are a major
determinant of profitability. Concerns have been expressed last year when Jet announced
its plan to take over Sahara. Air Sahara's rights must be redistributed to all airlines in
order to prevent Jet Airways from attaining a dominant position in slots as this would
restrain growth of competition. I suggest that Air Sahara's aviation rights should not
automatically accrue to Jet; the latter should instead be required to re-apply for securing
additional rights. The DGCA, as the competent authority should use this window to re-
distribute Air Sahara's rights to all airlines. Had Air Sahara continued and given the
inevitability of its closure, its rights would have anyway got released for distribution to
others and not available only to Jet.
Another important issue that needs to be addressed is that post Jet-Sahara Deal & IA-AI
deal , the number of players serving the International Routes have been reduced to half
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as no other domestic player is eligible for flying Internationally as per the current
regulatory framework.
With top 3 players having more than 80% of market share; chances of Cartelization are
more likely with the industry getting consolidated. Such attempts have been made in the
past. FIA-Federation of Indian Aviation was set up in 2005 by top airline industry
honchos to voice their needs to the government. Among its first meet, the federation had
thought of discussing pricing issues. However, this was aborted by timely intervention of
CCI. However, such attempts can be made again as cooperation is more easy with the
industry getting consolidated. So CCI must keep an eye on such instance of price
coordination. The transparency in fare dissemination news facilitates cooperation among
the colluding members.
For simplicity sake, the report is divided in various sections. The first three sections
include an introduction to the sector, its players and types of air services. The fourth
section highlights the importance of competition with reference to the Competition Act,
2002 followed by the concept of relevant market in the next section. Having defined the
Relevant market, section 7 will address the general competition related issues pertaining
to the Airline Industry. Section 8 will focus of regulations governing M&A in India,
cases of M&A Abroad and cases of M&A in India. Last but the least, Section 9 will
address all competition related issues pertaining to the Indian Airline Industry with
special reference to M&A in light of Competition Act, 2002. Section 10 incorporates the
Conclusion.
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SECTION I
INTRODUCTION
Civil aviation plays an integral role in development of an economy. It helps in realizingthe socio-economic objective of providing connectivity to foster travel & trade. As per
ICAOs estimates every 100 $ spent on air travel produces benefits worth 325 $ to the
Economy. It generates 100 additional jobs in air transport & 610 related jobs. Indeed this
was reiterated by our minister of Civil Aviation, Mr. Praful Patel who projected that 40
lakh aviation jobs would be available in the next 10 years.
Almost 35 % of exports from India & 97% foreign tourists to India arrive by Air each
year. Aviation sector has undergone a major facelift in past 3-4 years.
Phase I of Indian Aviation Sector (up till 1986):
The legacy of Indian aviation dates back to 1912 when Indias first air mail service was
started by Tata Airlines. Tata Airlines though was started as an air mail service but soon
ventured in carrying scheduled passenger traffic. In 1946, Tata Airlines was renamed as
Air India. In early 1948, a joint sector company, Air India International Ltd., wasestablished by the Government of India and Air India (earlier Tata Airline) .At the time
of independence the number of companies operating with in and beyond frontiers of the
country were 8 namely: Tata Airlines, Indian National Airways, Air service of India,
Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways.
The government in 1950 had set an Air Traffic Enquiry Committee to look into the
problems faced by the airlines. The soaring prices of aviation fuel, mounting salary bills
and disproportionately large fleets took a heavy toll of the then airlines. The financial
health of companies declined despite liberal Government patronage, particularly from
1949, and an upward trend in air cargo and passenger traffic. Though the Committee
found no justification for nationalization of airlines, it favored their voluntary merge. So
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Government in the wake of deteriorating financial conditions of the Airlines decided to
step in and nationalize the air transport industry and accordingly, two autonomous
corporations were created on August 1, 1953. In 1953, the government nationalized the
airlines via. The Air Corporations Act, 1953, which gave birth to Indian Airlines and Air
India. Indian Airlines was formed with the merger of eight domestic airlines to operate
domestic services, while Air India International was to operate the overseas services. The
Act also gave monopoly power to Indian Airlines to operate on domestic scheduled
services to the exclusion of any other operator. Air India became the only Indian carrier
to operate on international routes except for some routes to the neighboring countries
which were given to Indian Airlines.
Phase II (1986-2003):
The second phase of Indian aviation began in the year 1986 with granting of permission
to private sector players to operate as air taxi operators. The private players allowed to
operate as air taxi operators included Air Sahara, Jet Airways, Damania Airways, East
West Airlines, Modiluft and NEPC Airways. In 1994, government of India repealed the
Air Corporation Act there by. Following this measure in 1995, govt. granted scheduled
carrier status to six private air taxi operators. However, not many operators were able to
continue their business and by 1997 only four operators started operations followed the
deregulation continued to operate: Jet Airways; Air Sahara; Jagsons and Spicejet
(previously operated as Modiluft ) .Eventually, by 1998, at least six private airlines, East-
West, Modi-Luft, NEPC, Damania, Gujarat Airways and Span Air were closed and
according to an estimate, the capital losses involved in these closures were to the tune of
Rs 10 billion.
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Phase III: (2003 2006)
Only two private carriers survived to see the dawn of the new century. The duopoly of Jet
and Sahara as private carrier was challenged in 2003 by Air Deccan whose operations in
scheduled services began in August. The entry of Deccan changed the entire canvas on
which the aviation sector was defined. Air Deccan gave India its first Low Cost Carrier
(LCC) or no frills Airline! This marked as a turning point in the history of Indian
Aviation Sector as it marked a shift from the stereo type economy fares & business fares
to the era of check fares ; web fares ; APEX fares ; internet auctions ; Special discounts ;
Corporate plans ; last day fares; promotional fares etc. Arrival of Deccan has bought a
revolution in this sector, it changed the common mans perception of flying by matching
airline fares neck to neck with upper class railway fare. Air traffic growth since then has
witnessed tremendous growth rates. The figure shown below indicates the growth in
passenger volumes:
P
ost 2003, we see a 3 fold increase passengers traveling by air in India. Spurred by the
initial success of LCC Model, other airlines entered the sector and opted for No-Frill
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Model. Since then 5 other airlines namely Spice jet ; Kingfisher ; Indigo ; Paramount ;
Go Air have begun operations in India .Licenses have been issued to new carriers such as
Star Airlines ; Skylark ; Magic Air ; Air One and many more in the pipeline.
Phase IV: (Year 2006 onwards) :
Yet another milestone in the history of the Indian Aviation sector came in the year 2007
which is the year of Marriages in the Indian Skies! Though the marriage of Jet-Sahara &
IA-AI was announced in 2006 but the ultimate consummation materialized only in 2007.
The current year has witnessed a series of M&A of airlines namely: Indian-Air India; the
Jet-Sahara Deal; the Kingfisher-Deccan Deal. These players post consolidations have
claim over 80% of the market share.
The industry sources favored the consolidation attempts, as the proposed mergers would
help the carriers get rid of the widespread duplication of capacity, rationalization in the
route networks & fleets and also facilitate sharing of infrastructure, which would help the
merged entities, save a lot on its operational costs & enable the sector to tide over huge
industry losses. The mergers are expected to help the firms break even & there by ensure
carriers sustainability in long term. However, there is another side to this rosy picture.
Equally justified are the consumer groups who are feeling vulnerable& expect that post
absorption of important competitors such as Deccan & Sahara prices may increase in the
future. Air Deccan, Indias pioneer low costs airline made air travel affordable; with in
the reach of the common man. With its absorption, consumers fear that the days of low
fares are over. In this report, we will therefore analyze the relative merits and more
importantly highlight the appreciable adverse effects of mergers that will or may arise in
future; the potential threat that the proposed mergers might pose to competition.
The general perception is that competition is healthy for all the market as it guarantees
maximum benefits being trickled to the consumer groups. However, this doesnt hold true
for industries where there is room for economies of scale and scope. Undoubtedly, airline
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is one such industry where there exists economies of scale. There needs to be a minimum
efficient scale of operation to be sustained for breaking even. Thats probably the reason
for the oligopolistic structure of this industry.
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SECTION II
DRIVERS TO GROWTH:
Indian Aviation Sector has witnessed tremendous growth in the recent past which isdriven by sound demographic, macroeconomic, government aided reforms and market
dynamics. Industry sources call it the PEST Mechanism namely P-Political; E-Economic
S-Socio-Cultural; T-technological. The drivers to growth are:
Increase in Consumerism
Rising Disposable incomes
Rising Middle Class Population
Untapped Market
Increasing Business Travel
Increasing Tourists Travel
Entry of Low Cost Carriers
Increasing Competition
Government Reform Measures
The mix of the above mentioned fundamentally strong favorable dynamics has positioned
Indias Aviation industry in a high growth trajectory in the foreseeable future. World
wide, air traffic has a strong correlation with economic growth and in emerging markets
like India, a rise of 1% in GDP is expected to result in a 2% increase in air traffic.
Disposable income in India has gone up by 5 times in the last 2 decades and the
expenditure on transportation has risen from 6% to 14% in the same period.2 The increase
in trade activity within the nation is leading to the development of various mini metros.
This results in increased demand. It is expected that the emerging middle class along with
upper middle population will grow at 40 % of the total population in 2007, creating huge
demand for air-travel services.
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However, the penetration level of air services in India has been very low at 20 trips
/annum/thousand passengers in 2005 as against 2,300 trips/annum/thousand passengers in
United States and over 60 trips per annum per thousand passengers in China. India is one
of the least developed markets in the World and is among the most expensive in the
world (after adjusting for purchasing power parity).
2 ASSOCHAM Study: Road map to Civil Aviation, 2007.
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SECTION III
TYPES OF AIR SERVICES
1. Scheduled Air Transport Service means an air transport service undertaken between
the two or more places and operated according to a published time table or with flights so
regular or frequent that they constitute a recognisably systematic series.
2. Non-Scheduled Operation includes services other than scheduled air transport service
Eg: charter basis and/or non-scheduled basis. The operator is not permitted to publish
time schedule and issue tickets to passengers
3. An air cargo service means air transportation of cargo and mail. Passengers are not
permitted to be on these operations. It may be on scheduled or non-scheduled basis.
NOTE: In this report, our focus will be only on Scheduled Air Transport Service.
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SECTION IV
PLAYERS IN THE MARKET
Indian skies are housing a decent number of airlines today vis--vis the one man army
scenario prior to 1990s. The proud residents of Indian skies include the following:
1. Air India : Indias Legacy Carrier
The history of Air India is the History of Indian Aviation. Air-India began operating in
1932 as Tata Airlines, named after J. R. D. Tata, its founder. Founded as a small, private,
domestic carrier in 1932, Air-India is now government owned. It flies only International
routes and has negligible presence felt while catering to the domestic traffic.
2. Indian Airlines : With nationalization of Air Transport in 1953 via Air Corporation
Act,1953 , National Flag carriers : Indian and Air India were born. Indian was born from
merger of 8 domestic carriers .It caters mainly to domestic routes with some presence felt
in neighboring nations. Like Air India its a full service carrier. It has a subsidiary
Alliance Air .Its Symbol is Asokas Chakra. For a long spell of time, the two national
carriers enjoyed sole monopoly in the air transport segment as private carriers were
barred from entering the segment as per Air Corporation Act, 1953. It was after the New
Economic Policy, 1991 after which things fell in the right places and successful attempts
were made to enter the segment by private players like Jet, Sahara and others. Yet
another, turning point has come in the history of the Indian Aviation Sector when Air
India was granted permission from the Government of India to merge with Indian
Airlines, the two flag carriers of India.This Mega Merger marked the first marriage in the
Indian skies which was followed by two more marriages. The name of the new airline
will remain Air India, since it is known worldwide. They have been in the works of
completing the merger since January 2007, after permission.
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3. Jet Airways :
In 1993, Jet commenced its operations after the ban was lift by the government following
the repeal of Air Corporation Act.1956. Jet Airways will be the most preferred domestic
Airline in India. It will be the automatic first choice carrier for the traveling public and
set standards, which other competing airlines will seek to match. It is the only airline that
stood the crunch of late 1990s. Jet started its International Operations in 2004 and carries
more than 7 million passengers per annum. Recently, the company made news when
Naresh Goel led Jet Airways took 100 % stake in their arch old rival Air Sahara in May,
2007. This earmarked the second marriage of the season in the Indian Skies after the AI-
IA deal.
4. Air Sahara:
Like Jet, Sahara too began its operations in 1993 after the domestic Air Market was
opened by the govt. in 1990s. Air Sahara Limited is a leading private airline in India,
owned by the diversified Sahara India Parivar group. After Jet, it was only airline that
could stand the torrential winds of late 1990s. After series of controversies Air Sahara
has been taken over by Jet Airways in May, 2007. The airline is now renamed as Jet
Lite. Jet has intensions of converting Air Sahara in sync with LCC model to reach every
segment of air travelers.
5. Air Deccan:
Indias first budget carrier and now the largest flew its first carrier in 2003.Headed by
Captain Gopinath, Air Deccan truly redefined the accessibility to the Indian Skies. It
injected competitive spirits into the system and gave common man wings by reducing air
fares which matched the first Class Railway Fares. The third wedding in skies was
marked when Dr Vijay Mallya of Kingfisher Airlines picked up 26 % stake in Air
Deccan.
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6. Kingfisher:
The Airline began its operation in May, 2005 .its the by far the most flamboyant airline
in India, giving tough competition to Jet Airways in in-flight services. It is a major Indian
luxury airline operating an extensive network to 34 destinations, with plans for regional
and long-haul international services. Kingfisher Airlines, through one of its holding
company UB holdings Ltd has acquired 26% stake in the budget airline Air Deccan and
has offered to buy further of 20% stake from the secondary market.
7. GoAir:
The most colourful airline in India (comes in 6 colours) started its operations from
November, 2005. It belongs to the Wadia group.
8. Indigo:
The airline made heads turn when it placed the ambitious order of 100 aircrafts with
airbus. The carrier began its operations in August, 2006.
9. Paramount:
Its the only high value flier that India can boast of .It is the only carrier that uses 70
passenger capacitated Embraer Aircraft.The airline started operations in October 2005. It
was established by Madurai-based textile company Paramount Group. Paramount
presently operates only in South India. There was news of Paramount showing interest in
in picking up stake in Go Air and Spicejet so as to foray into Northern India
easily.However, so far dotted line has not been signed with any carrier.
10. Spicejet:
SpiceJet, a reincarnation of ModiLuft marked its entry in service by offering fares priced
at Rs.99 fares for the first 99 days since its inception in 2005. The carrier is giving tough
competition to Railways.This airline is known to have had made the least number of
mistakes.
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Fig 1:
As on 30th
April 2007, the status in the Indian skies is as follows:
MARKET SHARES OF DOMESTIC CARRIERS
Mkt. Share
23%
22%
18%
8%
6%
7%
3%
2%
11%
IA JET AIRDECCAN SPICEJET INDIGO AIR SAHARA GOAIR PARAM OUNT KINGFISHER
Source: Business Standard
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SECTION V:
IMPORTANCE OF COMPETITION
5.1 In common parlance competition in the market means sellers strivingindependently for buyers patronage to maximize profit or other business objectives. A
buyer prefers to buy a product at a price that maximizes his benefits whereas seller
prefers to sell the product at a price that maximizes his profit. Competition makes an
enterprise more efficient and offers wider choice to consumers at lower price. Fair
competition is beneficial for the Consumers, Producers / Sellers and finally for the whole
society since it induces economic growth. In order to realize this objective to competition
in the economy, the Competition Act, 2002 was passed which replaced MRTP Act, 1969
.The objective of Competition Act is to prevent anti-competitive practices, promote and
sustain competition, protect the interest of the consumers and ensure freedom of trade.
The objectives of this Act are to be achieved through the instrumentality of the
Competition Commission of India (CCI) which has been established by the Central Govt.
w.e.f 14th
October, 2003.
Areas focused under the MRTP Act, 1969:
i. Prohibition of concentration of economic power to the common detriment;
ii. Control of monopolies; and
iii. Prohibition of monopolistic, restrictive & unfair trade practices.
Where as the theme areas for the Competition Act, 2002 are as follows:
i. Prohibition of anti-competitive agreements;
ii. Prohibition of abuse of dominant position;
iii. Regulation of combinations ;iv. Competition Advocacy;
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5.2 Competition Act, 2002 shall prohibit anti-competitive agreements and abuse of
dominance and regulate combinations (mergers amalgamations or acquisition) through a
process of inquiry. It shall give opinion on competition issues on reference received and
is also mandated to undertake competition advocacy, create awareness and impart
training on competition issues.
Combinations that exceeds threshold limits specified in the Act in terms of assets and
turnover which causes or is likely to cause an appreciable adverse effect on competition
with in the relevant market in India can be scrutinized by the Commission. The
prescribed turnover levels for Merger & acquisitions are: Assets of the merged entity
more than Rs. 1000 Crores or turnover of more than Rs. 3000 Crores (these limits are US
$ 500 millions and 1500 US$ in case one of the firms is situated outside India.). The
limits are more than Rs 4000 Cr or 12000 Cr and US$ 2 billions and 6 billions in case the
merged entity belongs to a group in India or outside respectively.
Therefore this Act has been devised keeping in view the economic development of the
country by preventing practices which have appreciable adverse effect on competition.
Some important terms relevant from competition angle are explained below:
1. Abuse of dominance: According to Section 4, Competition Act, 2002 dominance is
defined as a position which enables a dominant firm to operate independently of
competitive forces or to effect its competitors or consumers or the market in its
favour. A firm may achieve dominance through innovation; superior Products;
affordable prices; efficient distribution system; satisfactory after sale service;
entrepreneurial efforts. Abuse of dominant position impedes fair competition
between firms, exploits consumers and makes it difficult for other players to
compete with dominant undertaking on merit. Abuse of dominant position
includes imposing unfair conditions or price, predatory pricing, limiting
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production/market, creating barriers to entry and applying dissimilar conditions to
similar transactions.
There shall be abuse of dominant position if an enterprise.-
(a) directly or indirectly, imposes unfair or discriminatory
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service,
(b) limits or restricts
(i) production of goods or provision of services or market therefore; or
(ii) technical or scientific development relating to goods or services to the
prejudice of consumers; or
(c) indulges in practice or practices resulting in denial of market access; or
(d) makes conclusion of contracts subject to acceptance by other parties of
supplementary obligations which, by their nature or according to commercial
usage, have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other
relevant market.
2. Anti-Competitive Agreements : As per Section 3 of Competition Act, 2002, any
agreement entered into between enterprises or associations of enterprises or
persons or associations of persons or between any person and enterprise or
practice carried on, or decision taken by, any association of enterprises or
association of persons, including cartels, engaged in identical or similar trade of
goods or provision of services, which(a) directly or indirectly determines
purchase or sale prices;(b) limits or controls production, supply, markets,
technical development, investment or provision of services; (c) shares the market
or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers
in the market or any other similar way;(d) directly or indirectly results in bid
rigging or collusive bidding, shall be presumed to have an appreciable adverse
effect on competition
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3. Relevant market is a key concept in application of competition law. It provides
as a tool in competitive assessment by identifying those substitutes products or
services which provide an effective constraint on competitive behavior of
products or services being offered in market by parties under investigation. As
defined by Section 2 of Competition Act,2002 Relevant product Market is defined
as a market comprising of all those products and services which are regarded as
interchangeably or substitutable by the consumer , by reason of characteristics of
the products or services; their price & intended use.
Relevant geographic market means a market comprising the area in which the
conditions of competition for supply of goods or provision of services or demand
of goods or services are distinctly homogenous and can be distinguished from the
conditions prevailing in the neighboring areas;
4. Regulations of Combinations ( i.e. Mergers & Acquisitions ): Combinations that
exceeds a threshold limits specified in the Act in terms of assets and turnover
which causes or is likely to cause an appreciable adverse effect on competition
with in the relevant market in India can be scrutinize by the commission. The
prescribed turnover levels are for Merger & acquisitions are: Assets of the merged
entity more than Rs. 1000 Crores or turnover of more than Rs. 3000 Crores (these
limits are US $ 500 millions and 1500 US$ in case one of the firms is situated
outside India.). The limits are more than Rs 4000 Cr or 12000 Cr and US$ 2
billions and 6 billions in case the merged entity belongs to a group in India or
outside respectively.
5. Competition Advocacy: As per Section 9 of Competition Act, 2002, the
Commission takes suitable measures, as may be prescribed, for the promotion of
competition advocacy i.e. creating awareness and imparting training about
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competition issues. In formulating a policy on competition (including review of
laws related to competition), the Central Government may make a reference to the
Commission for its opinion on possible effect of such policy on competition and
on receipt of such a reference, the Commission shall, within sixty days of making
such reference, give its opinion to the Central Government, which may thereafter
formulate the policy as it deems fit.
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SECTION VI
DEFINING RELEVANT MARKET
6.1 Now focusing on Aviation Sector, we go on to define the relevant market.
Relevant market is a key concept in application of competition law. It provides as a tool
in competitive assessment by identifying those substitutes products or services which
provide an effective constraint on competitive behavior of products or services being
offered in market by parties under investigation. As defined by Section 2 of Competition
Act, 2002 Relevant product Market is defined as a market comprising of all those
products and services which are regarded as interchangeable or substitutable by the
consumer , by reason of characteristics of the products or services; their price & intendeduse.
An analysis of nature of competition in the airline industry starts with identification of the
set of services the industry provides and the nature of demand for those services. Broadly
speaking the airline industry provides air transport services, which is divided into two
categories passengers and freight (cargo). For our analysis we shall focus only on
passenger services.
Air transport services face a degree of competition (at the margin) from other modes of
transportation. The set of potential substitutes for air travel depends upon the purpose of
travel. Now, the nature demand for air services is different across different class of
Travelers.
6.2 Travelers differ widely, in their ability to be flexible about origin and
destination airports and about time and day of travel and in their opportunity cost of time
spent traveling. Because most travelers are not flexible about their origin & destination
cities, airline markets are usually defined as city pair markets.
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6.3 Travelers who have a lower opportunity cost of travel generally enjoy a wider
choice of routes between the origin & the destination cities and hence benefit from level
of higher competition. But for time sensitive passengers indirect routes may not be an
adequate substitute for non-stop services. Hence there arises two separate categories of
travelers: one which is time sensitive who is traveling for business purposes-whose
opportunity cost of time is very high & the second category which is the leisure travelers
whose opportunity cost of time is not very high & their price elasticity of demand is very
high. The leisure travelers are highly responsive to price changes unlike the business
travelers who have a strict preference for time, day of travel and non-stop routings versus
indirect routings.
6.4 Therefore, competition concerns are focused more on time sensitive passengers as
their price elasticity of demand is significantly low. Evidence shows that for an
identifiable group of time-sensitive business passengers, one-stop service is not a
reasonable substitute for nonstop service; they would not switch to one-stop service in
response to a price increase in nonstop service. The airlines can and do charge these
travelers different prices than leisure travelers, targeting time-sensitive passengers with
fare restrictions and conditions. Airlines practice use variety of ticketing practices to
discriminate between time sensitive and non-time sensitive passengers. Some popular
practices are: (a.) Frequent flier programs which rewards loyal customers with free air
travel (b) through negotiating special arrangements with large corporate customers who
provide incentives for all travel with single airline. This practice allows airlines to price
discriminate even more precisely among purchasers with varying degrees of price and
time preferences.
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Recent econometrics work that shows that time-sensitive, business type consumers have a
strong preference for nonstop versus one-stop travel3 and by evidence regarding
corporate travel policies. The value that business passengers place on their time would
also make them unlikely to switch to one-stop service in response to an increase in
nonstop prices. Eg: If a non stop flight from Delhi-Mumbai is for Rs. 4000 on ABC
Airways then a 5 % increase in fares would amount to Rs. 200.Assuming that a transfer
caused a delay of about 2 hours for some technical reasons. Obviously, any business that
valued its executives time by more than Rs.100 per hour & would be willing to pay an
extra 5 % fare & board the alternate flight.4
Having built these blocks we go on defining the relevant market. Firstly, the relevant
market for time sensitive passengers is different from the relevant market for non-time
sensitive. As non-time sensitive passengers are flexible with respect to their choice of
route and mode of transportation so question so competition concerns doesnt arise with
them.
6.5 Reiterating the relevant market concept: it is said to incorporate all substitutes
products and regions which provide significant competitive constraint on the products
and regions of interest. As far as substitutes go, Railways are a near substitute for air
services but only valid for short to medium distance journeys. But for longer journeys,
3See, Berry, Steven, Carnall, Michael and Spiller, Pablo, "Airline Hubs: Costs,Markups 5 and the Implications of Customer Heterogeneity," NBER Working Paper5561, May 1996.
4 According, to 1996 American Express Survey of Business Travel Management, 78% of all companies have a policy to in place requiring employees to use lowestlogical fare but only 25 % of these corporates want their employees to use connectingflights to achieve lowest fares.
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there isnt a substitute available to match air services. Eg: if a person has to reach
Mumbai from
Delhi then no other mode of transportation can take him to Delhi in the same day. Given
that in India we dont have any super fast trains!
So we define relevant market as market for time sensitive passengers where market is
defined as a city pair market between origin and destination cities at a specified date and
specified time of the day. Business passengers have a preference for non-stop routes over
connecting routes. In absence of substitutes & the strict preference of time day & route,
airlines are likely to exploit business travelers.
In a nutshell, non-stop ,city pair wise flights at a particular time of a specific day is the
relevant marketIn a nutshell, non-stop ,city pair wise flights at a particular time of a
specific day is the relevant market
Now keeping this key concept of relevant market in the backdrop we proceed with our
analysis.
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SECTION VII
COMPETITION ISSUES PERTAINING TO THE AVIATION SECTOR:
7.1 Of late, there has been a lot of hue and cry over the mega mergers in the aviation
sector among the airlines. The consumers are feeling vulnerable and fear fares wouldincrease post consolidation. While industry sources condemn such fears & voice their
support in favor of consolidation on grounds that consolidation would bring some sanity
and rationality in the pricing pattern and end the saga of blood bath that inevitably every
carrier was witnessing. All most all carriers were bleeding and industry losses were
calculated to be around 500 million USD for 200607 as per Industry sources. The
mergers would benefit carriers from the joint. The mergers are expected to help the
industry tide over losses which would be ensured via network optimization; operational
rationalization and fleet rationalization. However, equally justified are the fears of the
consumer groups anticipating price rise post mergers. Definitely, these mergers have
competition related issues involved to them. Before dwelling on Mergers and Acquisition
cases, we will first identify the competition related issues pertaining to this sector.
Certain features of the airline industry favor anti-competitive practices.
In particular, the high degree ofprice transparency and multi-market contact among
the major airlines may facilitate coordinated behavior. Airlines also use Loyalty
Programs to discriminate between the time sensitive businessmen and the ones traveling
for leisure purposes.
I. Loyalty Programs:
Airlines attempt to raise the cost of switching between airline companies in three ways,
which are collectively called loyalty programmes:
1. Through frequent flyer programs, which reward loyal customers with free travel;
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2. Through travel agent incentive schemes (such as the so-called travel agent
commission override ) which reward travel agents for directing the bulk of their travel
towards a specific airline; and
3. Through negotiating special arrangements with large corporate customers who
provide incentives for taking all (or nearly all) travel with a single airline.
7.2 In passing, I may add that larger airlines can enhance their demand relative to
smaller airlines in many ways: For example, if airlines allow a traveler to change but not
cancel a reservation at the last minute, a traveler with uncertain plans will prefer an
airline with more frequent flights to the same destination than an airline with one
flight per day.
Loyalty programs such as Travel agents schemes; Frequent flier programs are Anti-
Competitive in Nature.
A1.Frequent flier program is a device chosen by the airlines to distinguish between
Business class and those traveling for leisure purposes. The business class passengers are
price inelastic and carriers can capitalize on this aspect by overcharging the business
class.
7.2 Frequent flyer programs operate like a volume discount. Once a customer has
flown on a particular airline with a frequent-flyer program, the value of subsequent
flights is enhanced by the increased opportunities for free travel. Because the marginal
value of the reward increases as the customer builds up miles or points on a single airline,
frequent-flyer programs encourage travelers to choose the airline that they are most likely
to fly on in the future.
7.3 The size of the loyalty effect will depend upon how rapidly free travel is earned,
on the size of the airlines network and on the location of the customer. The larger
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the airlines network, the more valuable is the free travel, as more opportunities
are available to the frequent traveler (the nature of the destinations may also
matter). The larger the number of flights offered by an airline at the customers
home city, the more likely the customer is to travel on a route served by the
airline, the faster the accumulation of awards, the greater the range of possible
free-travel destinations and the more likely there will be a nonstop flight to the
desired destination. Carriers might try to abuse their dominant positions as they
know that there isnt an alternative available in the relevant market. For a business
passenger traveling on work related matter, doesnt mind paying an extra Rs 1000
as his opportunity cost of time is much higher than that.
7.4 Indian; Jet; Kingfisher and Air Sahara operate Frequent Flier Programs. Jet has 3
tiers of loyalty program namely JP-Silver; Gold and Platinum Card which can be
redeemed. Similar is the structure for Kingfisher whose 3 tiers are Red (person traveling
more than 3 flights); Silver (if flights exceed 30) and most prestigious is Gold which is
obtained if annual flights exceed 60. Benefits such as Personalized Web Access
Membership Tier Bonus ;e-ticketing; IVR ; Pay Online Service ; Tele Check-in facility;
Web Check-in; Kiosk Check-in ;Complimentary Upgrade Vouchers; No Blackout
periods for Jet Awards; Lounge access at select airports; Additional baggage allowance
on Jet Airways; Priority tagging of baggage ; Guaranteed reservation up to 24 hours
before departure; Check-in at Club Premiere & PREMIERE counters; Cancellation fees
waived on published fares; Priority Standby ;Partner Benefits ; Dedicated customer
service center .
Hence a close review of frequent travelers programs and other loyalty programs for anti-
competitive issues is a must.
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A2.Travel agent incentive schemes
7.5 Airlines may also be able to enhance the demand for their services through
incentives & commissions on travel agents. Most travel agents earn increased
commission rates from at least one airline in return for steering passengers to those
airlines. There is a widespread belief within the industry that TACOs are most effectively
used by the dominant airline in an area. Just as with frequent-flyer plans, the rewards for
increased bookings on an airline are designed to encourage the agent to concentrate
bookings on a single carrier. Travel agent incentive schemes appear to be particularly
effective at increasing demand.
7.6 For example, in 1995 Air South, a low-fare airline which was concerned about its
inability to attract business travelers on its routes in the South East of the US, hired a
private consultant to test the extent to which travel agents may have been steering traffic
away from Air South. The consultant found that agents in some cities dominated by one
airline often did not provide Air Souths competing flight options in response to
anonymous inquiries, even though those options were listed in CRSs. In Miami, for
example, travel agents did not initially inform callers of available Air south flights 56
percent of the time, and even after the lowest fare was requested the agents did not
mention Air South 30 percent of the time. Instead the agents frequently recommended
flights by American Airlines, the largest carrier in Miami.
II. Multi-Contact:
7.7 It has long been posited that when firms face each other in a large number of
markets, they may compete less vigorously by allowing each other more or less exclusive
number spheres of influence. Put another way, the number of markets in which firms
meet is a factor influencing the likelihood of oligopolistic coordination or tacit
collusion This result arises from the fact that a dominant firm in an oligopolistic market
has more to lose in a price war than a firm with a small market share. A firm with a small
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market share is therefore a threat to the margins of the dominant firm unless the roles are
reversed in some other market. When each firm has one or more home markets in
which it is dominant, it is less likely to challenge the dominant position of a rival firm in
the rivals home market, for fear of facing competition in its home market. Such an
arrangement is likely to settle down into a live and let live situation. Conversely, the
biggest threat to such comfortable arrangements is likely to come from rival firms with
no domestic dominant position.
III. Competition in Vertically Related Markets:
7.8 It was noted earlier that the provision of air services requires the inputs of a host
of other Complementary airport services, includingtake-off and landing slots, air-traffic-control services, gates, passenger handling facilities, baggage handling facilities,
refueling, maintenance, cleaning and catering services and so on. In some cases
regulatory or security requirements or physical limitations on space limit the number of
firms that can provide these services. A merger or alliance between two or more firms,
which provide services in these markets, can both reduce competition in these markets
and can potentially distort competition in air transport services. As is well established,
competition enforcers need to consider the effect of mergers and alliances on all markets
in which the merged firms provide services.
7.9 A merger or alliance between two firms, which collectively have a dominant
position in these vertically related markets, could have an important impact on
competition in air services. In particular, a merger or alliance between two airlines
between two airlines which collectively hold a dominant position in slots or gates,
baggage-handling facilities, maintenance or in the ownership of a CRS could reduce
competition in these markets and allow these firms to abuse this dominant position to
constrain competition in the market for air services. Post merger, the merged entity
inherits extensive route networks and higher frequency of flights operating per day. This
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helps the carrier build loyalty of tourists as well as frequently traveling business class.
Hence, infrastructural scarcity acts as a bottleneck for new entry & there by strengthens
the merging /incumbents position as the case may be. We will further dwell on this issue
in later half of this report.
IV. Price Transparency & Collusion:
7.10 The airline industry features a very high degree of transparency over prices
and volumes. All of an airlines future fares are instantaneously available over computer
reservation systems, to which rival airlines can subscribe. Unlike other industries, such
transparency can be an instrument for collusion as it facilitates the detection of cheating
on a cartel agreement. It appears to be common practice for an airline to announce,
through the CRSs that its price on a certain route will increase by some amount beginningon a certain date in the future. The colluding parties take advantage of this transparency
& enter to a tacit collusion. The carrier then waits to see if others will match. If they do,
the price increase is implemented. If they dont, the airline suggesting the increase will
either withdraw it or push back the implementation dates. Other airlines might
counteroffer with a smaller increase, effective a day after the first increase. Then the first
airline may proceed with a smaller increase or counteroffer again. All of this occurs
without the airlines changing prices on actual sales.
7.11 This transparency acts as a boon and as a bane too. While transparency in the
pricing pattern is important to Consumer so as to make choice keeping in mind the cost,
schedule and time taken to complete the journey. At the same time, chances of
cartelization cant be ruled out either. As discussed above, the CRS system facilitates
Cartelization.
With respect to the Indian Scenario, after the series of marriages in the Indian Skies; the
chances of Cartelization has increased by many folds. With top 3 players pocketing more
than 80 % market share, chances of prices increasing on key routes, which are essentially
long distance and have no immediate substitutes are likely.
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7.12 The setting up ofFIA-Federation of Indian Airlines , a conglomerate of top
honchos of domestic airlines met in 2005 to form a federation that will provide a
common platform to debate industry issues and lobby the government and hammer out
solutions. To their misfortune, at their first meeting they had pricing issues on their
agenda, which by timely intervention of CCI was hauled and hence the very first step
towards cartelization was aborted. Moreover, that time the industry was scattered into
many players so chances of deviations were very high. In todays scenario, chances of
cartelization and its materialization are quite high as post consolidation with less number
of players tacit collusion is more chase able and deviation is less unlikely. So CCI must
keep an eye on such tendencies. More over, chances of coordination in prices might
become even higher if the Alliance between AI and Jet materializes. It is highly
recommended that the commission scrutinizes the proposal & its prospective pros and
cons before the two are allowed to sign on the dotted line.
V. Alliances & Competition Related Issues:
7.13 It is virtually impossible for a single carrier to serve all the places across the
World. However, what carriers can & definitely do is that they tie up with carriers of
other countries entering into alliances. An airline alliance is an agreement between two
or more airlines to cooperate for the foreseeable future on a substantial level.
The degree of cooperation differs between alliances. Airlines throughout the world have
entered into alliances for some time. The various co-operative arrangements include
(such as code sharing, blocked space, co-operation in frequent flyer programs, joint
marketing, service and purchasing, and franchising). These are undertaken to strengthen
or expand the aligning members market presence and to redefine or consolidate their
position in an increasingly competitive environment across the globe.
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7.14 The idea of alliances is that when carriers of different communities come
together, the combined route structure of the members of the alliances will be able to
cover as much as real estate as possible. Airline alliances benefits to the consumer by
offering seamless travel and services between a more extensive range of city pairs,
reduction in traveling time, joint lounges and co-ordination of FFPs.
7.15 Within the EU, for example, following successive deregulation directives for
air transport, any EU airline may now, in principle, serve any EU route. Air transport
within the EU has been liberalized with the aim to integrate the entire market as a "single
market" of air transport in Europe. With the aim of providing access to the entire
European Market uniformly, alliances seemed to be the need of the hour as no airline
alone could have a network vast enough to cater to every possible nook and corner of
Europe.
7.16 The liberalization process of developing a single market for EU had led to
stronger competition, a significant increase in the supply of air transport and lower tariffs,
especially on routes where airlines compete. The deregulation of the airline industry
allowed airlines to lower costs through restructuring largely around the hub-and-spoke
form and has enhanced the number of city-pair combinations that are served by non-stop
or one-stop service. Prices have also declined on average, particularly for discretionary
travelers and the volume of air travel has significantly increased. Even in the case of the
US, the deregulation of the airline industry has led to substantial benefits for consumers
On the other hand, the alliances have an anti-competitive effect also. There are also
factors which prevent consumers from benefiting fully from the positive effects of
liberalization as some cooperative agreements have anti-competitive effects. Alliances
involving code sharing can have significant procompetitive as well as significant
anticompetitive potential. On the anticompetitive side, they can result in market
allocation, capacity limitations, higher fares, or foreclosure of rivals from markets, all to
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the injury of consumers. On the procompetitive side, they can create new service,
improve existing service, lower costs, and increase efficiency, all to the benefit of
consumers. When a code share is proposed to link a city-pair market served by one
carrier with a city-pair market served by the other, rather than to cover a city-pair market
in which both carriers are actual or potential competitors, the proposed code share would
create what is referred to as an end-to-end efficiency, which is generally pro
competitive. Hence, Code sharing generates both pro as well as anti competitive effects.
Code sharing is a bane as the potential loss to the consumers exceed the benefit when the
share of overlapping routes are extensively large.
Hence each alliance is reviewed on a case- by -case basis by the Competition
Authorities to see that there isnt any adverse able effect of the alliance on
competition.
7.17 Before discussing the anti-competitive effects ofAlliances, we first need to
understand what is Code Sharing: Code-share is an arrangement whereby an airline sells
seats, under its own name, on another carrier's flight. Code Sharing is the most common
form Alliance. E.g.: A women had purchased a ticket from Boston to Amsterdam on
KLM-the Dutch carrier. However, KLM doesnt fly to Amsterdam. Though, the ticket
had the blue livery of the Dutch airline however, the code was that of North West
Airline-An American Carrier. This is referred to as code sharing where by one airline
sells seats under its own name on other carriers flights.
How does code sharing lead to anti-completion effects:
Generally, the greatest threat to competition comes when two of very few airlines that
compete in a market enter into a code-share agreement in that market.
7.18 Code sharing raises competitive concerns when the aligning members have
overlapping route networks. To better explain this, let us take a hypothetical example:
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Suppose neither Delta nor American Airlines operate a direct or a connecting flight from
Atlanta to the Kansas City. However, Delta operates a direct flight from Atlanta to Dallas
City while American operates a direct flight from Dallas to Kansas City. The routes in
the example above are complementary because together, they allow travel between two
cities (Atlanta to Kansas City) that is not possible on any one of the airlines in the
example. A code-sharing agreement between the two airlines allows each to sell tickets
on each others airline in the Atlanta to Kansas City market. The current literature
generally agrees that complimentarily in route networks among alliance partners ought to
benefit consumers both through reduced fares and expanded networks. However, suppose
prior to the code-share alliance both airlines in the example above offered competing
online service in the Atlanta to Los Angeles market, then this portion of the airlines
route networks are overlapping, and the alliance could facilitate price collusion. To the
extent that collusion occurs on Overlapping routes, fares on these routes may increase,
causing consumers welfare to fall. Hence there are increase in chances of a potential
collusive effect on products that were traditionally competed prior to the alliance, rather
than code-sharing per se.
Alliance allowed with Remedy:
7.19 The European Competition Commission under the provisions of the EC
Merger Regulation cleared the alliance between KLM & Alitalia. The Commission
considered that the alliance was globally pro-competitive, in particular in view of the
largely complementary nature of the parties' activities. Nevertheless, the Commission
found that the operation would have led to monopoly positions on two markets:
Amsterdam-Milan and Amsterdam-Rome. The parties had therefore to accept
undertakings with a view to attract potential new entrants on these markets and to
exercise a competitive pressure on the parties. The remedies included inter alia the
release of a significant number of slots at the congested airports in question and the
reduction of the parties' frequencies (up to 40% of the frequencies actually operated)
when a new entrant starts operating the problematic routes.
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7.20 International travel is not yet liberalized. It is still dominated by bilateral
agreements where by two nations sign an agreement to allow civil aviation between their
territories. Bilateral agreements continue to restrict competition on aspects such as the
number of possible flights, the number and the identity of the carriers and the airports that
can be served. There fore arose the need for transatlantic alliances. The EU airlines
forged an alliance with American Airlines to increase their connectivity.
Alliance rejected out rightly:
1. American Airlines and the TACA group composed of six Central American airlines
serving Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Republic of
Panama. American and some TACA carrier operated overlapping nonstop flights on
virtually all routes between Miami -- the principal Latin American hub in the United
States -- and the gateway cities in the Central American countries just mentioned, so that
American and TACA had combined market shares ranging from 88 percent to 100
percent on those overlap city pairs. At the same time, the number of passengers traveling
between Interior points in the United States beyond the Miami gateway and interior
points beyond the Central American gateways -- the only passengers who could not
already obtain full on-line service available from either American or the TACA group --
was an extremely small fraction of passengers flying gateway-to-gateway. So we found
this to be an almost exclusively horizontal agreement, in contrast to the largely end-to-
end international code-share agreements we had previously reviewed.
The DOJ concluded that the claimed efficiency benefits that are specific to the
transaction are very slight, while some potential risks to competition would inevitably
persist despite the best efforts to eliminate them through imposing conditions.
2. American Airlines/British Airways proposal.
The two carriers competed in a number of large nonstop city-pair markets, but also, as
was the case with USAir and British Airways in 1991, they compete for passengers
traveling between interior U.S. points and the United Kingdom. A key issue is whether
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and under what circumstances it is likely that "future competitors" will replace the
competition lost as a result of the proposed alliance. With open skies, new entry might be
likely on many of the overlapping city pairs in the absence of airport access constraints,
but the fact is that constraints on new or expanded service at London's Heathrow Airport
are significant. Consequently, we are assessing whether there are any conditions that can
resolve the Heathrow access problems to allow sufficient entry to replace the competition
lost from an American/British Airways combination. Since the DOJ was unsure about the
viability of new entry of a competitive airline service between the United States and the
United Kingdom, DOJ disapproved the alliance.
3. Delta, Continental, and Northwest Alliance:
In August 2002, Delta, Continental, and Northwest submitted code-sharing to the U.S.
Department of Transportation (DOT) for review. The DOT expressed concerns about the
potential competitive effects of the proposed Delta/Continental/Northwest code-sharing
alliance. The DOTs main concern lies in the significant extent to which the three
airlines route networks overlapped, which is unlike any other existing domestic alliance.
The DOTs analysis revealed that the three airlines offered overlapping services in 3,214
markets accounting for approximately 58 million annual passengers. Given the broad
nature of discussions that is required to implement the alliance, the DOT is concerned
that such communications among the carriers may result in collusion, either tacit or
explicit, on fares and service levels.
7.21 Note:Similar to this domestic alliance, is the recent announcement ofJet Group
Led Naresh Goyals willingness & keen ness to forge an alliance with AI for its
International Operations. All though, nothing official has been made till date, however if
the two enter in an alliance with one another in the near future, it would have serious anti-
competitive effects. Things wouldnt have been different had IA not merged with AI.
Now, things are different. The same alliance would have been a welcome change had IA
not merged with AI. Since, the domestic & the International Carriers have merged, hence
any attempts made towards alliance will have severe impact on competition as the two
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operating carriers have heavy domestic presence. The two carriers have an extensively
overlapping network of routes in the country. Coordination among fares may get
enhanced on domestic operations more than International operations. Together , Jet & IA
serve around 50 % of the Indian market .This 50 % is an aggregate all India figure;
however in individual city pair markets , their share may vary from 60% to even 90 % for
different routes owing to their vast route networks and frequency of flights operating per
day. Both of them are Full service carriers with the most extensive route network, which
no other domestic carrier in the country has. The two being the oldest airlines have access
to the peak slots at the congested airports, hence they have a dominant position w.r.t to
certain flights operating on key routes at peak slots. There fore, the commission must
review the Alliance if it takes place in future. It is highly recommended that the
commission must not permit Jet & IA to get into Code Sharing Arrangement where by
the two coordinate their prices. The two carriers operations must be strictly kept
independent in terms of pricing and marketing via Blockaded Seat Arrangement (which I
will discussed shortly). Also, the committee must see whether there exists chances of new
entry if the proposed alliance is leading to anticompetitive effects or say on monopoly on
some routes.
7.22 Hence, in particular, an alliance can significantly reduce competition on
overlapping non-stop routes and overlapping connecting routes where the allied airlines
were once main competitors. Even where the two networks do not overlap in the markets
they serve, the alliance can have serious anti-competitive effects by reducing or
eliminating competition on the hub-to-hub route(s)5 between the networks. Moreover,
alliances between airlines operating hub-and-spoke networks will normally enhance
demand for the network as a whole and increase the market power of the network,
especially at its hub airports. This entails the risk of rendering still more difficult new
entry into the network's markets to the detriment of both international and domestic
competition.
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In contrast, when a code share is proposed to link a city-pair market served by one carrier
with a city-pair market served by the other, rather than to cover a city-pair market in
which both carriers are actual or potential competitors, the proposed code share would
create what is referred to as an end-to-end efficiency, which is generally
procompetitive.
The commission must weigh both the pro and anti-competitive effects of the proposed
alliance before finally granting the anti-trust immunity to the alliance members.
Some important issues relating code sharing from competition angle:
7.23 If the code share partners will both operate flights in the market, the
Division/Commission then considers whether the agreement is structured in a way that
the partners capacity, scheduling, and pricing decisions will remain independent -- that
is, whether it is structured in a way that gives each carrier the strongest possible
incentive to sell seats on the flights it operates rather than on those of its code-share
partner, and to cut its prices and improve its service to gain market share against its
partner.
Now, code share agreements are of different types. The carrier that actually carries the
passenger is called as the operating carrier while the carrier that doesnt operate that
Route, yet it markets that route is called as the marketing carrier. Now, there are
different levels of cooperations possible in code sharing. First of all, airlines might give
their code-sharing agreement partners free or limited access to their seats. Free flow (free
sale) code-sharing agreements give the marketing carrier access to the operating carriers
inventory and allow it to market seats independently of the operating carrier. The risk is
completely on the operating carrier since the marketing carrier functions almost as an
agent.
5 Refer to Appendix for Hub-Spoke Network
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7.24 With respect to pricing, airlines might set the price of the seat sold under a
code-sharing agreement either in a coordinated way, which may lead to the result that the
seat will be sold at the same price wherever (operating or marketing carrier) the ticket is
bought, or each airline participating in the agreement can set its prices independently.
Where the code share does not entail a blocked space agreement, airlines have to agree on
how to compensate each other for the seats sold on one anothers flights. This is normally
done in special pro-rate agreements which establish the terms of revenue proration
between the partners.
7.25 One approach taken in some code shares to preserve some independence in
pricing and marketing of seats on the shared flights has been to use a block seatarrangement, where the marketing carrier purchases a fixed number of seats and bears
the risk of loss if those seats are not sold. The block-seat arrangement is not an ideal
solution, because the cost of the block of seats to the non-operating carrier, which is the
key determinant of the ultimate fare to the consumer, is set by agreement between
competitors. But the block seat arrangement is an improvement over joint sales and
marketing, because it can create some additional incentive to each partner to market its
seats aggressively.
In cases in which independent operations by the two partners are not contemplated or
considered likely under their proposed code-share agreement, and the Division concludes
that the code-share agreement would reduce or eliminate competition between the code-
share partners in certain city-pair markets, the next step in the Divisions analysis will be
to consider how likely it would be that new competitors would enter these markets in
response to any anticompetitive behavior by the code-share partners. If sufficient and
timely entry could be expected to neutralize any anticompetitive behavior, then the
Division would conclude that the code-share agreement would not be likely to create or
facilitate the exercise of market power by the code-share partners.
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7.26 At the international level (and outside the EU), bilateral agreements continue
to strictly limit the scope for competition. In particular, bilateral agreements limit, in
various ways, the number and identity of the airlines that can provide services between
two countries, the routes that can be flown, the number of flights that can be offered on
each route and sometimes the capacities and fares that can be offered. Bilateral
agreements often also prevent indirect flights from undercutting the price of non-stop
service. The bilateral system has been used to sustain inefficient national flag carrier
airlines and in the process has kept fares up, raising costs to consumers and to other
industries and has impeded the development of new travel products. In recent years some
countries (particularly the US) have sought to negotiate open skies agreements which
are less restrictive in regard to the number and identity of airlines and the routes or
capacities that can be flown. A number of such agreements have been signed between the
US and individual EU countries. These agreements still do not permit entry from carriers
based in countries outside the agreement to fly on routes covered by the agreement (e.g.,
a USUK open skies agreement would not permit Alitalia to fly London-Rome-New
York). Nor do the agreements permit cabotage (e.g., an US-UK agreement would not
allow BA to carry passengers from New York to San Francisco when flying London-New
York-San Francisco). There remains considerable scope for further multilateral
liberalisation, particularly in relation to the discriminatory treatment of foreign-owned
airlines.
7.27 Hence, in the case of an international code share, an important threshold factor
in assessing likelihood of new entry is whether the market is covered by an open skies
bilateral agreement. Open skies means that new entry by a carrier is legally possible,
although we would still need to investigate how likely such entry actually would be in the
event the code-share partners attempted to raise fares or reduce service. However, new
entry is legally constrained by a restrictive bilateral agreement, the threat to competition
of a code share on that city pair could be substantial, particularly if the code-share
partners were the only two carriers authorized under the bilateral agreement.
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Conclusion:
7.28 The Antitrust Division assesses on a case-by-case basis -- and market-by
market basis -- whether a proposed code-share alliance is likely to act as a disincentive
for the alliance partners to enter markets served by the other or to compete vigorously in
markets that they both serve. Commission must look to see whether the alliance is likely
to divide and allocate markets, or to produce high fares. Commission will place critical
importance on carefully reviewing the actual terms of each alliance agreement. Incentive
for each partner to market its own seats. Similarly, they would also look to see if there
were persuasive evidence that the code-share agreement would result in significant
procompetitive efficiencies in serving othercity pairs on a code-share basis -- efficiencies
that could not otherwise be obtained except through the code share. If so, also would
assess whether the procompetitive effect of these efficiencies would outweigh the
potential competitive harm in the overlap city pair.
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PART VIII:
AIRLINES MERGERS & ACQUISITIONS:
VIII.A
REGULATIONS GOVERNING M&A IN INDIA
8.1 Before going into the competition related issues pertaining to M&A of
airlines, well first have a look at the current policy framework going M&A in India.
Regulations governing Mergers & Acquisitions in India:
1. Mergers and acquisitions are regulated by the provisions of the Companies Act, 1956,
as amended (Companies Act)
2. Securities and Exchange Board of India Act, 1992 (SEBI Act) and the guidelines,
rules and regulations framed there under specifically the Securities and Exchange Board
of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as
amended, (Takeover Code)
3. Other legislations governing commercial transactions eg: Independent Regulators
approval.
4. The Competition Act, 2002 (Competition Act) that has been enacted but is not yet
fully enforced, contains provisions for governing competition issues relating to mergers
and acquisitions.
8.2 The Takeover Code requires an acquirer of shares which (taken together
with his existing shares or voting rights) would entitle him to more than five per cent of
the shares or voting rights in the target company, to make disclosures to the target
company and to the stock exchanges where the shares of the target company are listed.
The acquirer(s) is also required to make a public announcement in case he acquires
shares or voting rights (taken together with his existing shares of voting rights) that
would entitle him to fifteen per cent or more of the voting rights in the target company.
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