The Economic Times, March 23, 2006

By Pradeep S Mehta

Will the merger of Jet and Air Sahara airlines be anti-competitive, adversely affecting consumer interest? Unfortunately, most of the media has seen in this merger an element of cartelisation or abuse of dominance, and sought to analyse the merger from this perspective, without reference to the separate merger regulation in the Competition Act, 2002. Had the Competition Commission of India (CCI) been operational, the merger would have been scrutinised.

Merger regulation is generally ex-ante in nature, i..e., examination before the consummation of a deal. Whereas provisions relating to anti-competitive agreements (e.g., cartelisation) and abuse of dominance are ex-post in nature, i.e., examination after the practice has taken place.

A merger can be anti-competitive in nature if it creates a dominant enterprise that is likely to abuse its dominance. To some extent, the issue overlaps with abuse of dominance. Nevertheless, merger regulations exist in competition laws to pre-empt the potential abuse of dominance, as subsequent demerger is both difficult and costly.

On the other hand a cartel activity can take place when firms in the same sector collude in an anticompetitive manner, because competition among them is neither productive nor profitable. Having said this, is the Jet-Sahara merger fit enough to sail through without any roadblocks?

The Indian aviation industry is presently characterised by over-capacity. Besides, the airlines are facing infrastructure constraints due to limited parking bays, limited landing slots and congestion during peak hours. Competition in the sector has hotted up over the past few years with entry of new airlines.

No wonder, these are among the chief reasons for the merger. For Air Sahara, the weakest of all airlines, running in losses, the merger presents a better alternative than shutting shop as a failed airline. The merger also shows Jet as a serious player in the aviation sector.

Acquisition of Air Sahara’s parking bays and landing slots, domestic and international flying routes, technical staff and other ground handling facilities will help Jet rationalise and consolidate its operations, ensuring efficient utilisation of available infrastructure and other facilities.

These are expected to bring down its cost of operations, improve revenues and profitability, and provide more access to passengers to fly at potentially lower fares and better services.

However, given the emergence of Jet as a dominant enterprise controlling around 48-50% of the domestic market share, there is a fear that it can exert considerable market power. The dominance of Jet would be more in prime routes such as Mumbai and Delhi that account for over 30% of the country’s air traffic revenue.

This is apparent from the dominance of the two airlines in peak hour traffic. Over 60% of the peak hour departures from Mumbai and Delhi are controlled by the two airlines. Besides, they enjoy a significant control over parking bays in the two metros, which is crucial to fly from these locations in the morning. In Mumbai, the duo controls more than 60% of the parking bays, while in Delhi it exceeds 50%.

With increasing traffic and inability of airports to expand their infrastructure facilities in the near future, slots become a valuable resource and the combined entity would enjoy a considerable advantage on this front.

With limited access to slots, other airlines will face difficulty in providing a competitive threat to Jet. This places the combined entity in a position to exercise its market power and is a competition concern worth considering.

Other airlines have substantial capacity expansion plans, enough to bring to nought any attempts by Jet Airways to reduce the competitive pressure. However, the available landing slots, parking bays, runways at the airport are just not enough to facilitate this expansion.

This calls for urgently improving the aviation infrastructure, to facilitate expansion of existing airlines, encourage entry of new ones and allay any competition concerns. Till such time, the competition concern is credible.

With resulting dominance of Jet in peak hour traffic, it may hike fares during peak hours to cross-subsidise those in non-peak hours and out-compete other airlines. Jet is already doing this in certain routes.

Further, with limited competition, Jet may have little incentive to pass on the benefits (of economising on its infrastructure) to customers in the form of lower tariffs.

The key here is to prevent Jet from attaining a dominant position in slots. For instance, as part of the preconditions for British Airways/American Airlines alliance, the European Commission required the merging airlines to give up some of their slots to competitors. Given the current state of aviation infrastructure, there is need to impose similar conditions before approving the merger.

Air Sahara’s aviation rights will not automatically accrue to Jet; the latter will instead have to re-apply for securing these rights. The DGCA, as the competent authority should use this window to redistribute Air Sahara’s rights to all airlines.

Had Air Sahara continued and given the inevitability of its closure, its rights would have anyway got released for distribution to others, and not available only to Jet. The DGCA should take into account these factors.

Prima facie this merger would have come under CCI’s lens, given Jet and Air Sahara’s combined turnover of over Rs 7,000 crore, which exceeds the threshold of Rs 3,000 crore provided in the Competition Act. Though the CCI is in limbo, the provisions relating to combinations regulation in the Act provide an appropriate framework to analyse the merger from the competition angle.

To deal with the merger, there are two sets of issues worth considering. First, expedite the passage of the Competition (Amendment) Act, and for the CCI to keep watch over any anti-competitive practice that Jet could indulge in.

Secondly, the DGCA must reallocate rights of Sahara more equitably to all airlines, instead of just to Jet. And crucially the government must speed up the modernisation of airports, and provide better and greater infrastructure to all airlines.

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