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Sunday, April 3, 2011

Competition, cartels & civil aviation

The high fares charged by airlines for last-minute customers is not a mirage. I know of someone paying up to Rs 70,000 for a one-way fare from Port Blair to Delhi! This case is particularly unfair for an area where air is the only mode of access to the mainland given that sea transport is time-consuming and often not possible due to weather conditions. The high fares of domestic airlines also seem particularly unfair, given that international airlines offer hotels, stay and travel for the same price to some destinations in southeast Asia. Obviously, the fares are not related to cost of operations considerations. After public outrage, the minister has promised to look into the matter. It is not surprising that airlines have responded by a reduction in spot ticket prices in recent days. The government is indeed big brother to industry.

Yet, that does not seem the way to go about this and smacks too much of government arbitrariness. It is also clear that any formal directives by the ministry may well be thrown out by the courts. In addition, the DGCA is still a government unit and not an independent regulator along the lines of the SEBI , TRAI, etc. The setting up of a sectoral regulator for the aviation industry is still awaited.

Yet, even in the absence of a true sectoral regulator, a far more promising approach is to use the Competition Commission of India (CCI) which has been set up to regulate cartels. Is the pricing policy of the airline industry related to anti-competitive practices in the context of Sections 3 and 4 of the Competition Act, 2002? It is in this light that the CCI recently issued a notice to Jet and Kingfisher why their code-share agreement should not be termed anti-competitive. In the light of this, I will, in this article, look at the issue of competition and some jurisprudence in the context of the civil aviation sector.

The main point is that the judicial correction (the only long-term solution) to pricing in the aviation sector must depend on showing that the airline industry has been collusive in price determination. To show this, the CCI needs to show that provisions of Sections 3 and 4 of the 2002 Act have been violated. To do this three issues must be considered.

First, has cartelisation led to 'abuse of dominance'? This is the biggest problem as sheer dominance (as in the MRTP days) is not enough. While jurisprudence in India on this issue in non-existent, there is plenty of evidence from antitrust legislation in the US and Europe. First, what constitutes dominance? By and large, a market share of 50% is enough. But what constitutes 'abuse'? Here, it is necessary to show that airlines colluded (by correspondence or discussions) to fix prices. Here, the CCI would need to access relevant documents from the industry or find a 'whistleblower'. This seems to be the main method used in application of the Sherman/Clayton Acts in the US and Article 101 of the European Treaty.

But in addition, two other issues need to be determined. What is the 'relevant product' and what is the 'relevant geographical area' where the anti-competitive behaviour is implied? The relevant product, of course, is airline ticketing but the 'relevant geographical area' is not so obvious. For airlines often jack up prices in one area where competition is not so intense: you can hardly fly cheap to Mumbai to get to Port Blair! Here planning of route lines is a crucial issue.

It is not possible in the limited space to take up the issue of anti-competitive behaviour of airlines in detail. But the evidence from other countries shows that collusive pricing is fairly common. Recently, Martin Holland NV and 10 other airlines were found guilty of coordinating surcharges on cargo to and from the US. All pleaded guilty. Again, the alliance of BA, AA and Iberian Airlines was declared uncompetitive unless it made its landing slots available to competing airlines. There are many such cases of collusive behaviour (even in the last few years). The jurisprudence also indicates what are the most uncompetitive practices of airlines. Price fixing is right on top.

Yet, the most anti-competitive case was surely the mergers of Jet-Sahara and Kingfisher-Deccan some years back. Readers may verify that immediately after fares were raised by the airlines. Yet, as the CCI could not act against mergers (and still can't) no legal action was permitted.

Jurisprudence shows that airlines are prone to cartelisation. Yet the action must come after judicial scrutiny and consequent penalties rather than phone calls from the minister and meetings with ministry officials. The fares may come down now but is this a case of winning the battle and losing the war? Or maybe Mr Tata was right in calling India a 'banana republic'? It is time to seriously activate our regulatory institutions

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