Etihad, Jet – what of the rest?

In an important development for the airline industry, a five-member majority (Chairman and four members) of the Competition Commission of India (CCI) cleared the purchase of 24 per cent stake in Jet Airways by the Abu Dhabi-based Etihad Airways.

One member, Anurag Goel, dissented. It is also not clear whether the CCI relied on public opinion to arrive at its conclusions.

When assessing a merger, the CCI first determines a relevant market, or the market affected by the merger. In this case, the CCI has held that the relevant market would be for international air passengers as Etihad does not operate in the domestic market.

However, Jet Airways may continue to operate in the domestic market in future, and the impact on domestic passengers and other competitors after the merger would continue to be a concern in the Indian aviation sector.

The CCI holds that the market in an airline merger is looked at on the basis of a ‘city pair’ approach.

According to this, every combination of point of origin and point of destination (Delhi-Dubai is a city pair) of a flight is considered to be a separate market from the consumers’ point of view. An assessment by the competition law would be required when there is an overlap of routes travelled by the merged airlines.

This is because acquisition would lead to the reduction of a competitor.

Therefore, if both the airlines fly Delhi-Abu Dhabi and Mumbai-Abu Dhabi, the impact of the merger is assessed separately on both these routes or city pairs.

Perhaps, the most interesting takeaway from this decision is to read the majority and minority views of the competition bench on the city pairs affected by the merger.

A case in point is the Abu Dhabi-Mumbai and the Abu Dhabi-Delhi routes, where the combined market share of the two airlines is greater than 50 per cent but the majority does not anticipate any harm to the competition.

The two sides

The reasons cited by the majority are: Air India is a credible competitor to Jet and Etihad on these routes; Dubai and Sharjah airports can by substituted by Abu Dhabi, increasing the catchment area (or available clientele) of this city pair; indirect, or one-stop/two-stop flights, pose a competitive restraint on these airlines; and Indian passengers are fare-sensitive and time-insensitive.

Being fare-sensitive and time-insensitive means the passengers on these routes may alter their choices based on an increase in fares, but are flexible about the time or date on which they want to take a flight. According to the majority, all these factors, put together, render a potential fare increase unlikely on these routes.

On the other hand, the minority opinion holds that for short haul routes (where flight time is less than four hours) such as Mumbai-Abu Dhabi and Delhi-Abu Dhabi, a flight that is not non-stop may not be an effective option because customers who travel business/executive class are time-sensitive.

For others, a non-stop flight would still be preferred as they are generally cheaper, as demonstrated by the low market shares of Qatar Airways and Gulf Airways.

Air India, due to its widely reported financial constraints, is not likely to be able to compete effectively with Jet and Etihad on these routes.

The minority opinion also holds that Dubai and Sharjah cannot be considered substitutes for Abu Dhabi given that fares to Abu Dhabi and Dubai from Mumbai/Delhi are different — for instance, the fare charged by Emirates for Mumbai-Abu Dhabi is nearly double that of Mumbai-Dubai.

Also, consumers have not viewed them interchangeably, according to the minority, as out of 12,71,202 passengers who travelled between Abu Dhabi and India during 2012, only four travelled via Dubai.

It is interesting to note that the European Commission, which blocked the merger between Ryanair and Aer Lingus twice, used the 100 km/1 hour “rule” to define an airport catchment area.

This means that a distance beyond 100 km, or where travel time is more than one hour, will ordinarily lie outside the airport catchment area.

The distance between Abu Dhabi and Dubai airports is approximately 130 km. Hence, Mumbai-Dubai and Mumbai-Abu Dhabi cannot be treated as the same city pair, the minority view argues.

Divesting slots

In the US and Europe, if a competition authority believes that a merger may lead to increased fares on some routes, it can ask the merged entity to forgo slots on these routes, thus allowing other carriers to fly more direct and connecting flights.

For example, the US Department of Justice initially opposed the US Airways-American Airlines merger but reached a settlement recently, under which the airlines agreed to divest slots to allow low-cost carriers to fly more direct and connecting flights throughout the country each day.

By lowering barriers to enter and compete, such settlements enable low-cost carriers to expand their presence, injecting new competition.

However, the anti-competitive effects of any airline merger should not be overstated. To understand whether remedies may actually be required, a competition authority is required to predict whether there may be a potential competition law problem, such as increased fares and barriers to entry in the market as a result of the merger.

To do this, they are required to seek the views of disinterested third parties — airports, passengers, other airlines and so on --- to try to assess the effect of a merger and not just rely on the information provided by the parties.

Therefore, when the CCI claims that “all Indian passengers on the Mumbai/Delhi-Abu Dhabi sector are fare-sensitive but not time-sensitive” without referring to the source of such information, one wonders whether such an exercise was actually undertaken.

The minority also refers to this when it says that information available with the CCI has been largely provided only by Jet and Etihad and it has not been possible for the CCI itself to verify the data independently.

In this context, it is hoped the CCI will use the investigation powers at its disposal to make an independent and clearly reasoned assessment of the effects of merger.

It is noteworthy that Section 53B of the Competition Act clearly stipulates that besides the parties to the dispute or combination, “any person” aggrieved by an order of the CCI may approach the competition appellate tribunal.

Interestingly, the majority order cautioned the parties to the combination not to breach Sections 3 and 4 of the Act (Section 3 deals with anti-competitive agreements and Section 4 abuse of dominance) in future.

This overemphasis on future compliance of the law could have easily been avoided if a thorough investigation had been carried out earlier.

(Chaudhuri is partner, Khaitan and Company, and Gopalakrishnan is an associate in the same firm.)