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Jet Airways' Acquisition: Anti-Competitive Behaviour?

Anti-Competitive Behaviour? The acquisition of Air Sahara by Jet Airways marks the first round of consolidation in the markets for scheduled domestic air passenger and cargo traffic since the repeal in 1994 of the Air Corporations Act, 1953 that allowed the entry of private operators on a case-to-case basis. The question now being asked is: Will this acquisition adversely affect competition?

JET AIRWAYS’ ACQUISITION

Anti-CompetitiveBehaviour?

T
he acquisition of Air Sahara by Jet Airways marks the first round of consolidation in the markets for scheduled domestic air passenger and cargo traffic since the repeal in 1994 of the Air Corporations Act, 1953 that allowed the entry of

Economic and Political Weekly January 28, 2006

private operators on a case-to-case basis. The question now being asked is: Will this acquisition adversely affect competition?

After the second world war, a bunch of airlines entered the Indian domestic air traffic market. Air India, then owned by the Tata group, was the largest domestic carrier. In 1953 the industry was nationalised – Air India became a public enterprise, and the other private airlines were nationalised and merged to form the public enterprise, Indian Airlines. In 1990, private sector firms were allowed entry as air taxi operators as a kind of a prelude to their eventual entry as scheduled air transport operators. Both Jet Airways and Air Sahara, along with others such as East West, ModiLuft and Damania then made their entry. It was in 1994, after the repeal of the1953 legislation that private sector companies – those who were deemed to have met certain minimum financial and technical requirements – started providing scheduled air transport services. But certain mandated operations on “unprofitable” routes were specified, which of course were not to their liking.

In 1997, foreign equity of up to 40 per cent was allowed, raised later on to 49 per cent, while non-resident Indian interests were allowed up to 100 per cent equity participation. Foreign airlines are, however, still not allowed to pick up an equity stake in airlines operating in the domestic sector. The private operators changed the dynamics of the industry. There were entries and exits, the big exits were of East West, Damania/NEPC and ModiLuft, the latter metamorphosed last May as SpiceJet. Jet Airways and Air Sahara became the two leading private scheduled domestic air traffic operators, functioning as full-service airlines. The commencement in August 2003 of Air Deccan as a low cost airline brought about a significant change in the nature of competition. Air Deccan sought to price its air tickets in comparison to highend rail tickets. With its success, the viability of low-cost carriers is seemingly no longer in doubt, a number of imitators of Air Deccan have since announced their investment plans.

Kingfisher Airlines, promoted by Vijay Mallya of United Breweries entered the market last year, positioning itself in-between the full-service and low-cost segments, with aggressive moves that signalled an intention to price its air tickets 20-30 per cent below the prices charged by Indian Airlines, Jet and Sahara. Meanwhile, Air India has launched a low-cost airline, Air India Express that while operating mainly on foreign routes has also begun flying on a few domestic sectors. Indian Airlines, of course, suffered in the competitive race, in part because of the civil aviation ministry’s inordinate delay in approving its fleet modernisation and financial restructuring plans, as also an inability to deal with the very high employee-aircraft ratio.

The acquisition of Air Sahara will no doubt strengthen Jet’s infrastructure network – the landing and take-off slots at airports, parking bays and checking counters; Sahara’s Hyderabad hub will now add to Jet’s own hub at Mumbai; the international flying rights vested with Air Sahara, including its code sharing arrangement with American Airlines, will now benefit Jet. With the acquisition, the airline will now significantly strengthen its position as India’s largest airline and, according to some estimates, will start with a more than 50 per cent market share in terms of passengers flown. All this will help Jet to withstand competition from aggressive players like Kingfisher. Further, there are reports of an alliance in the making of Jet with Deccan Air to share certain routes in order to ward off Kingfisher. The question that involves the public interest is whether the Jet acquisition of Air Sahara and a seemingly anti-competitive agreement with Air Deccan in the making are likely to lead to a hardening of fares, ending the intense price competition of the past couple of years. Will the Competition Commission of India (under the 2002 Competition Act) then exercise its suo motu power to enquire whether the acquisition will indeed cause an appreciable adverse fallout? After all, the Competition Commission is in its third year since its notification in October 2003 and is supposed to take up work related to the likely anti-competitive

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effects of combinations between companies.

Economic and Political Weekly January 28, 2006

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