Rise of Low Cost Carriers: Reexploring the Traditional Market Definition

[Akshat Kothari is a 3rd year law student at Institute of Law, Nirma University]

The Indian aviation industry is attracting customers by offering affordable services.  However, the industry arguably suffers from its oligopolistic nature, since 90.5% of the market share vests with only few players. The interdependence in oligopoly allows the firms to operate in combinations and it gives rise to certain adverse effects. The competition authority seeks to control the adverse effects on all routes affected by the merger or alliance of airlines by examining them. For this, it is necessary for a competition regulator to evaluate the relevant market of the proposed merger. An internationally accepted ‘point of origin/point of destination’ (“O&D”) pair approach for determining the relevant market is used by the competition authorities. The Competition Commission of India (“CCI”) also uses this O&D pair approach in defining relevant market. However, the rise of the low-cost carriers (“LCCs”) has impacted the approach to the traditional market definition.

Through this post, the author first introduces and analyzes O&D approach of defining relevant market. Secondly, the author shall analyze the rise of LCCs for defining relevant market in the aviation industry. Finally, it is argued why it is important to revisit the traditional approach, especially given the rise of LCCs. Moreover, it is a well-established principle that European competition law is jurisprudentially a much more mature law as compared to the Indian antitrust regime; hence, the European jurisprudence is considered as part of the analysis.

What is the O&D Approach?

Notably, the basic notion of market definition in the aviation industry is identical to the broad concept of market definition used in competition law around the world, at least in terms of its essential characteristics. However, competition authorities and courts have accepted and used special elements and principles that bear relevance to the aviation sector in defining the relevant aviation market. In most cases, the European Commission and European courtsdefine the relevant product and geographic market in the aviation sector using the O&D pair approach on a non-directional basis, which states that every combination of a point of origin and a point of destination should be regarded as a separate market from the customer’s perspective, thereby following the demand substitution principle. For example, according to the O&D approach the route between Ahmedabad and Mumbai constitutes a separate market. This is because a passenger travelling from Ahmedabad to Mumbai is unlikely to regard a flight from Ahmedabad to Delhi as a reasonable alternative in the event when the fare from Ahmedabad to Mumbai is increased.

As a result, each of these O&Ds formed a distinct route, and each distinct route, in turn, formed a separate relevant market. To establish a relevant market following points are considered:

  1. Direct and indirect flights between O&D being substitutable.
  2. Indirect flights by competitor between O&D being substitutable.
  3. Different classes of passengers, and inflight services rendered to different classes, being substitutable.
  4. Time and price sensitive passengers (Business/Holidays).

Analysing the O&D Approach

Demand-Side Substitutability

Primarily, the European Commission carries out the demand side substitution analysis for the purpose of defining the relevant market.[1] The O&D approach replicates the demand side point of view of economics and thereby examines all possible routes from a point of origin to a point of destination that are not considered substitutable with a different city pair. Hence, every market is considered as a distinct relevant market.

While determining the demand-side stance, it is also important to make a distinction between different group of passengers, since different services may be substitutable for various types of consumers. The first distinction is between time sensitive and non-time sensitive travellers. Time sensitive passengers are only concerned about the faster connections and a higher level of punctuality; however, on the contrary, non-time sensitive passengers are concerned about the low fare rate and adaptability with the duration of light rather than flight frequencies. The second distinction is between connecting flight passengers and passengers going via a direct flight (point to point passengers). Unlike O&D (point-to-point) travellers, connecting travellers only fly between two airports as part of their journey, and the airport where the connection is made is neither their point of origin nor their point of destination Therefore, connecting passengers and O&D passengers may be in distinct markets.  

Supply-Side Substitutability and Network Effects

Large network carriers operating a hub-and-spoke system contend that network effects should be considered when defining the relevant market. The network effects assumes that a large part of passengers would use the hub airport for connecting flights; hence, the number of routes available from a given airport should be considered. The role of network effects comes into play when it comes to supply-side substitutability. The O&D approach to market definition may need to be adjusted to account for this factor. As a result, competition between hubs and alliances, as well as the bundle of routes operated by merging airlines from an airport and the popularity of frequent flyer programmes, may play a role in determining how appealing a given route is to various types of customers. The US Department of Transport and the European Commission considered network effects as an important factor in merger decisions.

The Indian Position

In Jet Airways/Etihad, the CCI introduced the relevant market for air passenger service on the basis of the O&D pair approach. The CCI defined the O&D pair approach as a combination of a point of origin and a point of destination, where every combination is considered to be a separate market. It also observed that two or more adjacent airports shall be categorised in the same relevant O&D market. The CCI observed that this approach is in consonance with the definition of relevant market as provided in section 2(t) of the Competition Act, 2002.

However, the CCI also pointed out that when analysing network impacts, it is vital to look beyond the O&D pairs and consider the potential network implications of the proposed combination. Improved access to gates, slots, and other market-connecting infrastructural interfaces are among the benefits of hubs. Instead of point-to-point O&D pairs, rivalry among systems has been shown to be rising.

The Rise of LCCs

The emergence and proliferation of LCCs, in place of full-service carriers (“FSCs”) has had a significant impact on the approach to market definition in the context of demand-side substitutability and viable ways to sub-segment demand amongst distinct groups of customers. The emergence of LCCs has resulted in an increase in capacity and reduced fares, which has resulted in an increase in demand from price sensitive consumers. LCCs and FSCs have since begun to compete for the demand that is less time-sensitive and more price-sensitive. The rise of LCCs also has repercussions on the supply side substitutability when analysing in terms of airport substitution.

LCCs were originally focused on point-to-point connections to/from rural airports. However, LCCs are being regarded by airport administrators as a way to raise passenger numbers, placing pressure on FSCs to meet with rising competition from the LCCs. Indeed, LCCs have recently begun growing into large hub airports, putting them in into competition with traditional FSCs on some routes. This has created a situation where air transport service at an airport has constrained the provision of similar service at the other adjacent airport and does not provide a complete picture of the competitive landscape. Thus, in such circumstances, “airport pairs” rather than “city pairs” would be more appropriate in defining the relevant market. Thus, it is suggested that when competition authorities analyse the competitive consequences (particularly network effects) of an alliance, the traditional O&D technique may need to be enlarged rather incorporating a different definition.

Way Forward

The author is of opinion that since the O&D approach to market definition is demand driven, it has the advantage of being able to account for a wide range of important competition factors in the aviation industry. As passengers analyse all available options for getting from one point O to another point D, this definition reflects the demand side perspective. Even though airlines frequently assert that a supply-side perspective is a vital parameter for the purpose market definition, the traditional market definition is appropriate for that purpose too. Finally, to take the LCCs into account in the market definition, LCCs face serious repercussions on the traditional approach with regards to the sub-segmentation of the consumers. Thus, instead of forming a new technique, the traditional definition of the O&D approach shall be expanded. Hence, due to modern development in the aviation industry such as LCCs, it is time for the competition authorities around the world to rethink the approach of defining relevant markets in the aviation industry.

Akshat Kothari

[1] John Milligan, Chapter 8: Mergers and in European Union Competition Law in the Airline Industry, 14 Aerospace Law and Policy Series 111-150 (Kluwer Law International 2017).

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