Compptitive Issues in Indian Aviation

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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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Competition Issues in the Civil Aviation Sector

Nancy Shah, 30.7.07 1

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.

8/4/2019 Compptitive Issues in Indian Aviatio

Compptitive Issues in Indian Aviation

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