Brief Summary. ( To read the full post click here )
What will be the impact of the Jet-Etihad alliance on the Indian aviation industry? Is there likely to be any anti-competitive fallout as a result of this merger? How are these concerns watched and evaluated by the market regulator or CCI?
The situation:
The “Open Skies” policy of the Government is fueling rapid air traffic growth. Many new private airlines have entered the industry and international carriers have boosted the number and frequency of their flights. Recently, Jet Airways signed a deal with Etihad in what was the first FDI infusion into the airline sector and another manifestation of the sector’s growth trend.
Competition Dynamics Would Alter As Stakes Change the Game
CCI’s Competition Assessment Approach: In order to conclude that there are ‘no competition concerns or distortion’ of market competition in the Jet-Etihad deal, the following aspects were considered:
- CCI studied the impact on the market for international air passengers in which the two players operate,
- To gauge “customers” preferences and the effect of the deal on them, CCI examined the points of origin and destination (O&D pairs) in the India-UAE sector (routes that both Jet and Etihad currently fly). CCI also looked at substitutable travel options available to passengers on these routes,
- Finally, CCI examined how market efficiency resulting from the collaboration might benefit customers.
Anti-Competition Red Flag Raised
Although the Etihad-Jet deal was approved by India’s main competition regulator “Competition Commission of India”, a subsequent appeal was filed by Jitendra Bhargava, a former executive of Air India. Mr. Bhargava claimed, in his appeal, that the CCI had failed to evaluate how the deal could potentially curb competition. If the proposed combination were to be allowed, the appeal said, passengers were likely to have fewer options on routes, price, aircraft, timings and service quality.
Our View: Analysis of Competitive Concerns
- Competition Authorities often scrutinize the actions of large or dominant players in a given industry for signs of price fixing or other collusive conduct. For example, when airlines increase prices in tandem, there is a high possibility of cartelization, leaving consumers with fewer options.
- In September 2013, the Air Passengers Association of India (APAI) lodged a complaint with the CCI, alleging cartelization by airline operators. At the time, all domestic carriers including Air India and Jet Airways had simultaneously hiked fares by a massive 25 percent, following a 6.9 percent increase in jet fuel price. Noting that the carriers fly many models of aircraft with varying fuel intake, the APAI said that “as against this they have increased the fares uniformly”. Such behavior of large players controlling the market could also be held as “Jointly Dominant”.
- Also, mergers and acquisitions in the airline industry can result in a concentration of markets by certain players who acquire the significant market power to abuse dominance. In October 2006, the European Commission disallowed Ryanair’s quest to increase its stake in Aer Lingus, a company in which the former already owned a 29% stake. The Commission noted that the merger would create a monopoly for the parties concerned on 22 routes and lead to market share exceeding 60% on all remaining routes.
Litmus Tests Used By Competition Regulators
- Competition Authorities assess “material” or “decisive” influence over another undertaking to review the possibility of any anti-competitive conduct. Whether the acquirer can mold the target’s policies and strategies in the marketplace and influence its commercial objectives is the litmus test used by competition regulators.
- However, authorities often approve deals to save a “Failing Firm” when there is evidence to show that the firm in question is unable to reorganize its business with other alternatives and that it would be forced to exit the market without the merger. For example, the European Union’s antitrust authority approved the acquisition of Greece’s Olympic Air by its compatriot, Aegean Airlines as Olympic was experiencing dire financial straits that were likely to soon put it out of business. This is done with a view to preserving certain efficiencies that benefit the market or consumers.
- The Malaysian Competition Authority, MyCC issued a proposed decision on 6.9.2013 fining MAS and Air Asia by RM10 million for a tie-up by Comprehensive Collaboration Framework Agreement entered in August 2011 – which saw the two airlines sharing markets over routes within Malaysia. Both MAS and Air Asia are main players of the Malaysian aviation sector and a market sharing agreement essentially limits the consumer’s choice.
- According to Competition Expert Jo Yan of MahWengKwai & Associates, Malaysia: “As the MAS and AirAsia decision will be a seminal decision in terms of penalties, it is important for the MyCC to ensure that it sets the right tone for compliance and enforcement. Further, it is also important for MyCC to publish the grounds and methodology of its final decision.”