ARE ASIAN GIANTS CHANGING THE COMPETITION DYNAMICS IN INDIA?

MAY NOT BE REPRODUCED BY ANY MEANS WITHOUT EXPRESS PERMISSION. ALL RIGHTS RESERVED. © 2014 ASA

ANUPAM SANGHI & ASSOCIATES

COMPETITION MATTERSMarch, 2014

The situation:The “Open Skies” policy of the Government is fueling rapid air traffic growth. Many new private airlines have entered the industry and international carriers have boosted the number and frequency of their flights. Recently, Jet Airways signed a deal with Etihad in what was the first FDI infusion into the airline sector and another manifestation of the sector’s growth trend.

A few questions to be answered:

What will be the impact of the Jet-Etihad alliance on the Indian aviation industry? Is there likely to be any anti-competitive fallout as a result of this merger? How are these concerns watched and evaluated by the market regulator or CCI?

COMPETITION DYNAMICS WOULD ALTER AS STAKES CHANGE THE GAME

CCI’s Competition Assessment Approach: In order to conclude that there are ‘no competition concerns or distortion’ of market competition in the Jet-Etihad deal, the following aspects were considered:

• CCI studied the impact on the market for international air passengers in which the two players operate,

• To gauge “customers” preferences and the effect of the deal on them, CCI examined the points of origin and destination (O&D pairs) in the India-UAE sector (routes that both Jet and Etihad currently fly). CCI also looked at substitutable travel options available to passengers on these routes,

• Finally, CCI examined how market efficiency resulting from the collaboration might benefit customers.

ANTI-COMPETITION RED FLAG RAISEDAlthough the Etihad-Jet deal was approved by India’s main competition regulator “Competition Commission of India”, a subsequent appeal was filed by Jitendra Bhargava, a former executive of Air India. Mr. Bhargava claimed, in his appeal, that the CCI had failed to evaluate how the deal could potentially curb competition. If the proposed combination were to be allowed, the appeal said, passengers were likely to have fewer options on routes, price, aircraft, timings and service quality.

THE ASA VIEW: ANALYSIS OF COMPETITIVE CONCERNS• Competition Authorities often scrutinize the actions of large or dominant players in a given industry for

signs of price fixing or other collusive conduct. For example, when air lines increase prices in tandem, there is a high possibility of cartelization, leaving consumers with fewer options.

• In September 2013, the Air Passengers Association of India (APAI) lodged a complaint with the CCI, alleging cartelization by airline operators. At the time, all domestic carriers including Air India and Jet Airways, had simultaneously hiked fares by a massive 25 per cent, following a 6.9 per cent increase in jet fuel price. Noting that the carriers fly many models of aircraft with varying fuel intake, the APAI said that “as against this they have increased the fares uniformly”. Such behavior of large players controlling the market could also be held as “Jointly Dominant”.

• Also, mergers and acquisitions in the airline industry can result in concentration of markets by certain players who acquire significant market power to abuse dominance. In October 2006, the European Commission disallowed Ryanair’s quest to increase its stake in Aer Lingus, a company in which the former already owned a 29% stake. The Commission noted that the merger would create a monopoly for the parties concerned on 22 routes and lead to market share exceeding 60% on all remaining routes.

LITMUS TESTS USED BY COMPETITION REGULATORS• Competition Authorities assess “material” or “decisive” influence over another undertaking to review

the possibility of any anti-competitive conduct. Whether the acquirer can mould the target’s policies and strategies in the market place and influence its commercial objectives is the litmus test used by competition regulators.

• However, authorities often approve deals to save a “Failing Firm” when there is evidence to show that the firm in question is unable to reorganize its business with other alternatives and that it would be forced to exit the market without the merger. For example, the European Union’s antitrust authority approved the acquisition of Greece’s Olympic Air by its compatriot, Aegean Airlines as Olympic was experiencing dire financial straits that were likely to soon put it out of business. This is done with a view to preserve certain efficiencies that benefit the market or consumers.

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• The Malaysian Competition Authority, MyCC issued a proposed decision on 6.9.2013 fining MAS and Air Asia by RM10 million for a tie-up by Comprehensive Collaboration Framework Agreement entered in August 2011 - which saw the two airlines sharing markets over routes within Malaysia. Both MAS and Air Asia are main players of the Malaysian aviation sector and a market sharing agreement essentially limits the consumer’s choice.

• According to Competition Expert Jo Yan of MahWengKwai & Associates, Malaysia: “As the MAS and AirAsia decision will be a seminal decision in terms of penalties, it is important for the MyCC to ensure that it sets the right tone for compliance and enforcement. Further, it is also important for MyCC to publish the grounds and methodology of its final decision”

TO READ ABOUT EMERGING JV DEVELOPMENTS IN THE SECTOR CLICK

REFERENCES:

Industry Market share of domestic airlines http://dgca.nic.in/reports/Market.pdf

NewsSpiceJet Ltd signed a three-year inter-line agreement with Tiger Airways, which operates Tigerair, connecting 14 Indian cities to Singapore via Hyderabad.

http://www.livemint.com/Companies/3mC6BThB39Vl8maiQbMCLJ/SIATata-airline--Readying-for-takeoff.html

Jet-Etihad deal approved http://www.livemint.com/Page/Id/2.1.49927288

Challenge of CCI approval http://www.business-standard.com/article/companies/competition-appellate-tribunal-issues-notice-to-cci-on-bhargava-appeal-113121900976_1.html

http://www.financialexpress.com/news/air-india-says-jet-airways-etihad-airways-deal-anticompetitive/119363820/12/2013

MARKET SHARE OF SCHEDULED DOMESTIC AIRLINES

IndiGo Go Air SpiceJet JetLite Jet Airways Air India (Dom) Mantra

Jet Airways +JetLite = 22.5%

Mantra 0.0% Air India (Dom) 19.1%

Jet Airways 17.1%

JetLite 5.4%Go Air 9.0%

IndiGo 29.5%

Spicejet 19.8%

CAPACITY VS DEMAND

Capacity (ASK) Demand (RPK)

5.8

-0.5 0.2 0.1

-7.5

0.4

-0.6-0.3

-4.8

-8.8

-4.8 -7.7

-12.0

-3.9

-3.8

-0.2

3.9

% C

hang

e O

ver M

onth

25

15

5

-5

-15

-25

Year over Year

May June July Aug Sep Oct Nov Dec Jan Feb March Apr May

-7.0 -5.9

-7.3

-3.8 -4.2

-5.3

-1.3 5.1

8.8

PASSENGER LOAD FACTOR OF SCHEDULED DOMESTIC AIRLINES

During the month of May 2013, all the scheduled domestic airlines complied with the mandatory capacity deployment requirements contained in the Route Dispersal Guidelines. Airline-wise details are given in the following Table:

Airline ASKM Development (%) of Category ICat III Cat IIA Cat II

Air India + Alliance Air 80.5 1.50 20.6

Jet Airways + JetLite 96.6 1.77 17.5

Spicejet 108.9 1.51 25.4

Go Air 125.3 2.33 63.9

IndiGo 100.2 1.30 15.9

Minimum Capacity Requirement in accordance with RDG (As % of Capacity Deployed in Category I)

Category II 10%

Category IIA 1%

Category III 50%

Apr-13 May-13

82.0 78.9

75.169.4

77.2 71.0

80.9 75.0

85.8 79.5

89.6 83.8

0.0 0.0

Pass

enge

r Loa

d Fa

ctor

(%)

100

80

60

40

20

0 Air India Jet Airways JetLite Spicejet Go Air IndiGo Mantra

COMPLIANCE OF ROUTE DISPERSAL GUIDELINES

Discount war heralds tighter competition among airlines http://www.livemint.com/Companies/Xol5KVMvaabxuC8IiqVZ6O/Air-India-announces-flash-sales.html

Increase in seats to Dubai could hurt Air India, Jet Airways http://www.livemint.com/Companies/LSvALwXzhIu1uVKX4y6g8O/Increase-in-seats-to-Dubai-could-hurt-Air-India-Jet-Airways.html

No Violation of takeover code in Jet deal: Etihad http://economictimes.indiatimes.com/news/news-by-industry/transportation/airlines-/-aviation/no-violation-of-takeover-code-in-jet-deal-etihad/articleshow/31827885.cms

LegalCCI’s assessment following the challenge (copy of order) http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/ C-2013-05-122%20Order%20121113.pdf

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BACKGROUND

In 1994, India repealed the Air Corporation Act of 1953 and opened up its skies to competition. This effectively ended the government’s monopoly on air transport. Air traffic grew and several private players joined the fray. As competition in the sector intensified, the consumer began to see some positive benefits in the form of improved service quality and reduced airfares.

The TataSons-Singapore Airlines venture, where the Tatas will hold 51% stake and Singapore Airlines the remaining 49%, is an extension of the vision of the Tata Group, which forged a tripartite partnership with Air-Asia and Arun Bhatia’s Telestra Trade place for low-cost carrier Air Asia’s entry into India. This will open up competition on west-bound routes. It will initially operate domestic services from New Delhi and compete with full service carriers Air India Ltd and Jet Airways (India) Ltd, which are the only players in the full-service market since the collapse of Kingfisher Airlines Ltd in 2012.

Recent events in the ‘Open Skies’ airline environment:

Around 70% of the Indian domestic market is dominated by low-cost carriers such as IndiGo, SpiceJet Ltd and GoAir. Tata is also starting up a low-cost carrier joint venture with Malaysia’s AirAsiaBhd, increasing the competition in this segment.

Etihad picked up a 24 percent stake in Jet Airways for about Rs 2060 crore. The main shareholders in the merged airline are Naresh Goyal, the current chairman of Jet Airways with 51%, Etihad with 24%, and others, including the public, with 25%.

Meanwhile, on 16 December, SpiceJet Ltd, India’s second largest low-fare airline, signed a three-year inter-line agreement with Tiger Airways, which operates Tigerair, connecting 14 Indian cities to Singapore via Hyderabad.

CURRENT MARKET STRUCTURE

The domestic airline space, in its present form, is largely dominated by low-cost carriers such as IndiGo, SpiceJet Ltd and GoAir. It is an oligopolistic structure with a relatively small number of players holding significant market share but no one airline dominating it. There are significant cost barriers to entry and economies of scale and scope are a given. For an airline to break even in this environment, it must achieve minimum levels of efficiency in its operations.

Tata-Singapore Airlines & Jet-Etihad deal:Tata-Singapore Airlines & Jet-Etihad deal shows foreign companies are betting on long term potential.

TO READ ABOUT EMERGING JV DEVELOPMENTS IN THE SECTORAs Indian airline carriers wrestle with a decline in passenger traffic amid slowing economic growth, they are looking to companies outside to finance their growth and expansion plans. Giving impetus to this inclination is the government’s recent change in Foreign Direct Investment (FDI) rules allowing overseas airlines to acquire up to 49% of Indian ones.