Competition Law vis-à-vis Aviation Sector

However, the untimely demise of Jet Airways have resulted in considerable market concentration. The Herfindahl-Hirschman Index (HHI index), which is used to understand the amount of concentration in the market, stands at 2860, indicating significant concentration in the sector, which suggests that relatively few players dominate the whole market. The lower the HHI index, the more fragmented the market is.

In the recent trend, the overall number of passengers increased to 12.4 million in August 2023. Indigo maintains a market share of more than 63%, with the Tata group's total market share being at 26.8% in August 2023.

Consequences of Exit of Jet Airways on the Market Dynamics of the Aviation Sector

The exit of Jet Airways in April 2019 caused significant market upheaval. Due to a mismatch in demand and supply, airfares surged. Indigo has risen to the position of undisputed market leader as a result of Jet Airways exit. The impact of Jet Airways leaving and the simultaneous emergence of IndiGo Airways can be described as follows:

1. Price disruption

Jets collapse during a period of high demand crippled the growth of the aviation industry. The abrupt grounding of a 109-airplane fleet resulted in a sharp increase in airfares, making this mode of transportation less appealing to price-conscious consumer.

2.  Rise of Indigo

Indigo domestic shares almost touch 50% post the exit of the Jet Airways. Although the competition act 2002 does not prohibit dominance, the risk of Indigo leveraging its market power to suppress its competitors looms at large. This CCI must keep an eye on its activities and aim to strengthen the current players and promote the entry of new entrants in the market to exercise reasonable competitive constraints on Indigo.

The Challenges Faced By CCI in Regulation of the Aviation Sector

1. Oligopolistic market

Because of the oligopolistic character of the aviation industry, the market is interdependent and prone to anti-competitive agreements as the presence of just a handful of players ensures that such agreements can be readily implemented and deviations may be dealt upon accordingly.

In the case, Express Industry Council of India vs Jet Airways and Ors, CCI held the airline market's oligopolistic structure is conducive to coordinated and concerted activity.  The CCI had also warned against considering  price parallelism as a criterion for establishing the presence of a cartel in such an oligopolistic industry. Such pricing might be the result of intelligent market adaptation.

2. Jurisdictional tussle

The airline industry is strictly regulated, with the Directorate General of Civil Aviation serving as the major regulating authority. The CCI need to be cautious when dealing with possible points of conflict between the functions of the DGCA and the CCI, given its history of jurisdictional tussle with other sectoral regulatory bodies such as TRAI. Avoiding such disagreements with the DGCA is critical to ensuring efficient resource utilisation and appropriate implementation of competition law in the aviation industry.

3. Formidable entry hurdles

To enter the aviation sector it requires high capital intensive regulatory requirements:-

a) Fleet and Equity requirements

Section 3.2 of the civil aviation requirements for obtaining a schedule or operator permission states:

• Airlines operating with aircraft weighing more than 40000 kg must have a paid-up capital of Rs. 50 crores for the first five aircraft, with an additional equity investment of Rs. 20 crores for each subsequent aircraft.
• Airlines operating with aircraft weighing less than 40000 kg must have a paid-up capital of Rs 20 crore for the first five aircraft, with an additional equity investment of Rs 10 crore for each additional aircraft.

This indicates that only entity with a large amount of capital may enter a sector like this. This is in contrast to the rules in the United States and the European Union, which examine an entrant's financial health and sustainability without setting any specific fleet or equity requirements.

b) Air Turbine Fuel

ATF covers 40% of the airline's expenditures. There is an urgent need to rationalise the ATF tax system. The central excise duty is now 11%, while state taxes is 30%. The tax cascade effect and the resulting high tax burden limits the entry of new players into the market.

Furthermore, the absence of competition for public sector oil companies at major airports results in a lack of competitive pricing, which eventually leads to increased airline costs. In the case of Express Industry Council of India vs. Jet Airways and Others, three major airlines were found to have conspired to establish fuel surcharge costs for cargo transportation.

c) Route dispersal requirement

The government's policy on regional and remote area air connectivity requires all airlines to operate 6% of their total domestic operating capacity in remote and strategic locations as designated by the government. It becomes increasingly difficult for new entrants to survive in the market, limiting entry to those who are able to bear the losses sustained by operating on these undeserved routes. Although the government gives incentives for new entrants to operate on these routes, including as exemption from landing and parking charges and route navigation facility payments.

The Future Challenges that CCI will Face in the Aviation Sector

1. Code sharing agreements

A code sharing agreement is a commercial agreement in which the airline operating a flight permits another airline to market and sell tickets for the flight as if it were the airline operating the aircraft. Code share partners must also agree on how they would reimburse one other for seats sold on each other's flights. All of these agreements are typical in the aviation sector, and their anti-competitive effect cannot be neglected by the CCI. The CCI head dealt with code sharing superficially in MP Mehrotra vs Kingfisher Airlines Limited and Ors, dismissing anti-competitive concerns by referring to it as an industry practice. Furthermore, this may result in higher rates and lesser quality services for customers, which must be examined. This type of collaboration might also result in coordination of price between the competitors.

2. Infiltrating the Airport Operation Market

Another looming issue is the potential involvement of airline service companies into airport operations. The CCI has authorised TRIL Urban Transport Private Limited's acquisition of shares in GMR Airport Limited, a totally owned subsidiary of Tata Reality and Infrastructure Limited, which is a wholly owned subsidiary of Tata Sons Private Limited.

GMR Airports is present in the upstream business segment of airport development, operation, and maintenance, which is in a vertical relationship with the service provided by Tata Sons Group entities involved with the downstream market of providing airline services through joint ventures such as AirAsia. Because of Tata Sons' vertical integration into the airport operation sector, this connection has the potential to cause anti-competitive concerns. The CCI must look into any vertical integration of airline operators into the airport operating market that might result in market foreclosure and force downstream players out of the market.

3. Loyalty Programs

Loyalty programs promoted and implemented by big airlines may potentially pose substantial competition problems in the market, since they tend to strengthen the airline's market position and have the potential to harm consumers welfare.

Such an offer may hinder market entrance, making it exceedingly difficult for a new entrant to obtain an economically sustainable market share. Such programmes, when offered by international alliances in which points or rewards can be earned and redeemed by consumers while travelling with any of the partner airlines, may also bind consumers to the service of a specific alliance and have an anti-competitive effect on the entry of new market players.

4. Algorithmic collusion

The CCI must address the issue of algorithmic collusion in airline ticket pricing as soon as possible. Algorithmic collusion refers to any type of anti-competitive agreement or cooperation among competitors that is enabled or implemented by an automated system. Instead of humans colluding, this includes programs or systems colluding via algorithms.

To conclude, Firstly, the aviation industry is highly consolidated, with significant entry hurdles and regulatory oversight. Recent changes in the business have the potential to pose substantial anti-competitive concerns, such as Indigo airline's abuse of dominance and pricing cartels by incumbent players, which should be mitigated to allow for faster competition in the market.

Secondly, The market has shrunk from 8 to 10 players to 5 to 6 players. The government has made an effort to create advantageous circumstances for foreign investment in the aviation industry by allowing up to 49% stake in airline operations under the automatic route.

However, the business continues to be burdened with debts as operational costs rise, necessitating considerable governmental action to encourage investment in existing players and the entry of new competitors to assure a competitive environment. To create a vigorous competitive environment in the sector, the ministry of civil aviation, the DGCA, and the CCI must work together.

Views are personal.