[Anik Bhaduri is a III year student and Sudipta Choudhury a II year student, both at NALSAR University of Law]
In November last year, the Competition Commission of India (CCI) began an inquiry into allegations of price-fixing in the airlines industry, while in March 2018 the Commission imposed a penalty on three airline carriers for price-fixing. These frequent investigations by the CCI point at the frequency of instances of price-parallelism and the likelihood of collusion in the market, indicating a need to reform the structure of the market.
As of 2017, the market for airlines in India was dominated by four major players who held an overwhelming 90.5% of the market share, making the market a collusive oligopoly where there are a few sellers that have a very high incentive to collude. In such a concentrated market, it becomes easy to create and sustain anticompetitive agreements because the transaction costs and the risk of defection by others goes down as the number of sellers in the market decreases. The market is also characterized by very high barriers to entry, which enables existing sellers to consolidate their market power without facing any threats from new entrants.
The aviation industry in India is regulated by the Directorate General of Civil Aviation (DGCA), which has the power to look into all aviation incidents and accidents in India The DGCA also lays down regulations from time to time with a view to the proper functioning of the industry and implements the government policy regarding civil aviation. It is responsible for the ex ante monitoring of the industry, while the CCI has the power to deal with anticompetitive practices in an ex post manner. The CCI can thus investigate anticompetitive practices and impose penalties after such conduct has already taken place, but cannot bring in any structural changes which reduce the barriers to entry – such changes can be undertaken only by the DGCA.
The aviation industry, by its very nature, involves very high fixed costs which can often deter potential entrants to the market, but an analysis of the Indian situation shows that these barriers are fortified by government regulations which make it almost impossible to enter the market for civil aviation. As a result, the existing players are assured that they will not face any new competition, and therefore may not have adequate incentives to improve their products or services, or to engage in price-cutting, thus leading to supranormal profits at the expense of the consumer who does not have much of a choice.
The regulations on fleet and equity requirements, route dispersal guidelines, provisions regarding allocation of slots and the pricing of air turbine fuel (ATF) are some of the various barriers that hinder the entry of new players into the civil aviation market.
Fleet and Equity Requirements
India‘s Civil Aviation Requirement (CAR) Section 3, in Parts II and III, mandates that a scheduled service operator that applies to provide services using aircraft with a takeoff mass of 40,000 kg or more must purchase or lease a minimum of five aircraft with start-up equity requirement of Rs. 50 crore. Additionally, as an airline’s fleet grows in increments of up to five planes, equity requirements grow by Rs. 20 crore. These requirements are aimed at ensuring that the new entrants to the airlines market are financially viable, but they impose very high burdens on potential entrants who already have to incur huge fixed costs.
While it is necessary to assess the financial viability of scheduled air service operators, other jurisdictions try to do so in a manner that does not strengthen barriers to entry. For example, in the UK, the USA and Australia, potential air carriers are required to demonstrate their viability by disclosing their assets, liabilities, past and ongoing litigation and operational insurance while the fleet requirement stands at one aircraft. The fleet requirements in the Indian airline industry seem to ignore the possibility of a viable airline starting its operation with less than five aircraft, despite there being quite a few examples of it. Ryanair, which began operations in 1980 with just one aircraft and today operates from 44 bases across 27 countries, is a case in point.
Route Dispersal Guidelines
Government of India Order No. AV 11012/2/94-A lays down how an airline carrier is to divide its fleet among three categories of air routes. Category I links major cities and airline hubs which enjoys heavy passenger traffic, while categories II and III comprise air routes to remote provincial cities where the traffic is low. While this regulation aims at reducing the disparity between various parts of the country in terms of air connectivity, economically it leads to losses for the airlines.
This regulation requires air carriers to dedicate their scarce resources to provide connectivity to underserviced airports. Often the airlines cannot recover the variable costs from the revenues they earn from operating on a category II or category III route, thereby incurring losses. Entry into the market requires heavy fixed costs in the form of buying or leasing aircraft, paying airport fees and so on which makes it essential for the airlines to earn profits if they are to recover their fixed costs. Failure to recover the operational costs therefore makes it impossible for new entrants to survive in the market, and skews the market in favour of the existing players who have huge economies of scale and can afford the losses incurred by operating on routes with less traffic. The regulation becomes economically inefficient and serves as a barrier to entry, unless sufficient incentives are provided to the new entrants by way of subsidies or otherwise.
Allocation of Slots at Airports
In India, the Airports Authority of India and the DGCA allot slots in accordance with the IATA guidelines. Principles of slot allotment sections 7.1.1. (in subsections (e) and (f)) lay down that existing airlines are to be allocated slots on the basis of historical precedence, if the slots in question have been utilized by the passenger airliner to whom they were allocated at least 80% of the time during the last season. Subsection (g) states that slots may not be withdrawn in order to accommodate entrants, and new entrants have access to only 50% of the slots. Moreover, when airlines merge, the merged entity retains all the slots that the airlines had access to before the merger.
These so called ‘grandfather clauses’ benefit the existing players, or the proverbial grandfathers of the industry, while new entrants find it difficult to compete. The policy of slot allocation serves as another barrier to entry, which deters potential entrants from the civil aviation market. The US does not follow the IATA guidelines because of antitrust reasons, while the UK and the EU allow slot-trading between various airlines. The situation in India needs to be reformed if barriers to entry are to be reduced – auctioning of underutilized slots by the AAI might be a solution.
Taxation and Pricing Air Turbine Fuel
The Indian Government charges a heavy tax on ATF which is anyway expensive as the market for ATF comprises only four suppliers who do not usually have any incentive to compete in terms of pricing. These excessive prices and taxes not only make it difficult for the airlines to survive in the market, but the costs are usually transferred to the customers in the form of prices.
ATF alone accounts for around 40% of the operational expenses of the airlines, which hinders existing airlines from expanding their service and deters potential entrants to the market. While the existing airlines can afford the costs of the fuel because of their economies of scale, it becomes almost impossible for a new entrant to continue in the market.
Further issues like the antitrust immunity granted to airline alliances also make the market anticompetitive and reduce the choices available to consumers, which forms an essential part of consumer welfare. It is evident that the regulatory policies implemented by the DGCA have led to inefficiencies in the market, making it impossible for the CCI to fulfill its objective of ensuring consumer welfare. Without going into the scholarly debate on the relationship between the competition authority and the sectoral regulator, we would like to point out that the Indian aviation sector clearly requires both the authorities to work together keeping in mind the ultimate goal of consumer welfare and economic welfare.
– Anik Bhaduri & Sudipta Choudhury