This article is written by Rohit who is pursuing a Certificate Course in Competition Law, Practice And Enforcement from LawSikho.
The Competition Commission of India has always been firm on its stance of cartelization and it is a red flag ever since the beginning. It was one of the major reasons that surfaced the idea of Competition Law. It is well to recognize that in fighting cartels, it is very important to have strong investigative machinery, supported by mutual assistance agreements with other countries in investigating such organizations and sharing information of the operations of cartels. Such robust bodies help to culminate threats of monopolies and provide a healthy economic market which leads to the holistic development of the industry as a whole and the Competition Commission of India is doing just with all means to prohibit monopolies in the market. “Cartel” has been covered under section 3 of Competition Act, 2002 i.e. ‘Anti-competitive Agreements’: Agreements that cause appreciable adverse effect on competition by any way of creating barriers to entry, driving out existing competitors etc.
Section 3(1) of the Competition Act, 2002 states that “no enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”
The Competition Commission of India (CCI) in 2015 ordered a probe into the matter upon a letter of Lok Sabha Secretariat with a request to examine whether there is any evidence of cartelization in the airline sector. These allegations were brought into light after it was observed that similar fares were being offered by IndiGo, SpiceJet, GoAir, state-run Air India and now-defunct Jet Airways (Including JetLite) on certain routes viz. Delhi-Bombay-Delhi, Delhi-Bangalore-Delhi, Delhi-Hyderabad-Delhi, and Delhi-Pune-Delhi. 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.
However, it was important to examine a set period of time to identify any kind of a pattern in this concern. The Commission examined the data regarding cost of operations, flights operated, passengers carried throughout the year on these 4 routes from April 2012 to March 2014. The analysis of the four major routes indicated that airlines were maintaining some degree of stability in their market shares in both lean and peak seasons. The similar cost structure of airlines appeared to facilitate collusion and it was observed that despite differences in base fares and airlines fuel surcharge, the end fares charged by all the airlines for tickets, were almost similar. With respect to such observations an investigation was conducted the Director General (DG).
The DG examined the market share of the airlines on the mentioned 4 routes, cost structures and the method of pricing taken up by the airlines to charge the fares. The examination was done considering the factors on the basis of (a) Monthly market share for each of the four sectors (b) Annual market share for each of the four sectors (c) Consolidated All India Annual Market Share and its analysis (d) Economic analysis of monthly share for each of the four sectors.
It was observed that the monthly market shares of each of the five airlines on all the four routes during the given period had been generally fluctuating by significant margins and that the pattern of market share did not indicate any linkage between two or more airlines which otherwise would have shown some trend had there been any foul play by the airlines. The Investigation revealed that there is significant variation in growth witnessed by different airlines as compared to growth in the overall market which resulted in some of the airlines losing market share whereas few others gaining.
Market shares of the five airlines did not witness any specific pattern. Indigo has been able to significantly increase its market share from 21.7% in 2010-11 to 38.7% in 2015-16 at the cost of other airlines as Air India, Jet Airways and Spice Jet lost market share on a consolidated all India basis level. Go Air has been able to barely maintain its market share during the period. There were significant variations in the market shares and market positions of different airlines during 2010-2016, and these market shares did not show any kind of stability or parallelism. It was however found that in one sector i.e., Delhi-Pune-Delhi, there was no significant variance during 2012-2014 but variance was found to be quite significant during 2014-2016. Considering that the variance was quite significant but no conclusive finding can be arrived with regard to operation of cartel among the five airlines on this sector also.
The high fares charged by airlines for last-minute customers is not a mirage. The pricing model taken up by these airlines were observed. It was noticed that airlines follow a dynamic pricing mechanism for which they use softwares such as ‘Navitaire’ and ‘airRM’ etc. which update the airfares dynamically by taking into consideration factors such as prevailing or expected demand conditions, actual booking, price of competitors’, seasonality etc. and set corresponding booking limits for the updated airfares for each flight. These systems require the airlines to segment their inventory into different fare buckets. The fare charged would move from lower to higher bucket as the occupancy increases and as the departure date comes closer.
In a high-demand scenario, the number of seats allocated in a given bucket may be reallocated to higher buckets. It should be noted that pricing of the ticket is the most important factor in attracting maximum number of passengers and the fare is charged keeping in mind the market fares in general. It was concluded that price parallelism has become the natural outcome, but it cannot be said to be the result of any agreement or action in concert.
Investigation report further stated that the airlines follow dynamic pricing where the same seat is sold at different fares to customers depending on their date of booking. A flight is opened one year in advance for booking of tickets. The earlier a ticket is booked, lower is the fare and vice-versa. Although most of the airlines use software which is programmed to allocate inventory on the basis of historical data fed into its system. An algorithm configured by software allocates the total number of tickets to different fare buckets immediately on opening of the flight. The route analyst after taking into consideration the competitive airfares determine the price for each bucket. It was found that there is no fixed inventory allocated to each bucket and that the number of seats allocated to each bucket depends on the time of day, day of week and season.
However, no two buckets are simultaneously available to the customers which implies that at any given point, only one fare is available. Furthermore, the airlines keep on changing the price/inventory allocated to fare buckets due to change in demand and competitive price, which may happen multiple times a day. When sale happens, the flight fare moves from a lower bucket to higher bucket. It was observed that fare buckets of three airlines namely IndiGo, GoAir and SpiceJet (the data for Air India and Jet Airways was unavailable as Air India expressed its inability to provide the data and Jet Airways had closed down its operations) contribute to 80% of the total seats on four different routes viz,
(i) Delhi-Mumbai;
(ii) Delhi-Pune;
(iii) Delhi-Hyderabad; and
(iv) Delhi-Bengaluru.
It can be said there were variations in every factor taken into consideration for examining the alleged cartelization by the said 5 airlines working domestically on 4 prominent routes. However, the pricing mechanism was similar but pricing is always done according to what the competitors charge and hence pricing alone cannot become a deciding factor whether two or more entities are colluding or not. The main objective of Competition law is to stop private players from obstructing market economy and monopolizing the market. The basic idea is that there should be free and fair competition which will promote consumer welfare, increase production efficiency, maintain the quality of goods produced and keep dominance in check. Cartelization works against this very basic principle and is one of the many ways by which private players obstruct market economy.
Firms do tend to restrict competition by entering into collusive agreements to fix prices and outputs, and they often take exploitative and exclusionary steps as means to achieve this vicious end and it may even happen that some major players in the market join hands and enter into a joint venture or some other form of combination to prevent new players from coming up while they rule the roost. But we saw the joint venture between TATA and AirAsia started operating domestic flights in India in 2014 and many big players like Kingfisher and Paramount Airlines exiting the airline sector. This vibrancy in the market, where new entrants are able to gain a strong foothold and established players are not immune from being edged out of the market, was noted as a testament to the high level of competition in the Indian airline sector.
Hence, the Competition Commission of India is of the opinion that no case of contravention of the provisions of Section 3(1) of the Act read with Section 3(3) thereof is made out against the airlines and the present matter is ordered to be closed forthwith under the provisions of Section 26(6) of the Act.
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