Oligarchs Beware: The CCI is Watching!

The competition regulator holds the aviation market structure

to be oligopolistic. Further declares that tacit coordination

amongst airlines are agreements likely to cause an

appreciable adverse effect on the competition in India

In what is considered to be yet another landmark

ruling¹, the Competition Commission of India (“CCI”),

on 07 March, 2018, whilst partly modifying the

quantum of penalties imposed on Jet Airways (India)

Ltd. (“Jet”), Inter Globe Aviation Ltd. (“Indigo”) and

Spice Jet Ltd. (“Spice Jet”), reaffirmed its own findings given

by its order dated 17 November, 2015.

Background

An information was filed under Section 19(1)(a) of The

Competition Act, 2002 (“Act”) by the Express Industry

Council of India (“EICI”) against Jet, Indigo, Spice Jet, Air

India and Go Airlines alleging inter alia, collusion in fixing

of the Fuel Surcharge (“FSC”) rates for cargo transportation

by the domestic airlines, thereby engaging in anticompetitive

practices.

That vide order dated 17 November, 2015, the CCI negated

the report of the Director General (“DG”) and noted that Jet,

Spice Jet and Indigo had acted in a concerted manner and

colluded in fixing of the FSC. Such activities were found

to have resulted in indirectly determining the rates of air

cargo transport and accordingly were held to be in violation

of Sections 3(1) and 3(3)(a) of the Act. Consequently,

penalties of '151.69 crore, '63.74 crore, and '42.48 crore

were imposed on Jet, Indigo and Spice Jet (“airlines”),

respectively.

On appeals preferred by the airlines, the Competition

Appellate Tribunal set aside the order of 17 November, 2015

and sent back the matter to the CCI for fresh consideration

with the direction to reconsider the report of the DG and

pass orders after hearing the parties.

That upon reconsidering the report of the DG, the CCI

reiterated its disagreement with the findings of the DG and

accordingly, show cause notices were issued to the parties

calling upon them to explain as to why the conclusions

drawn by the DG, against them not be disagreed with.

Observations of the CCI

While holding the airlines liable for anti-competitive

practices, the following observations were made:

• The CCI held the aviation market structure to be

  oligopolistic. The five main airlines (stated above)

  competed against each other for passenger and cargo

  business. It was further noted that such a structure is

  conducive for coordinated and concerted behavior.

• The CCI further observed that the aviation sector has

  low elasticity of demand for air cargo services, common

  intermediaries (controlling 80% of the business), high

  entry barriers and presence of trade associations. These

  factors facilitate discreet coordination.

• The CCI negated the contention of the airlines that

  revenue from FSC constitutes a small component of

  their freight charges. The CCI held that nearly 20% to

  30% (average) of freight revenue comes from the FSC.

• By giving wide connotation to the definition of

  ‘agreement’ under Section 2(b) of the Act, the CCI held

  that an agreement would include a tacit understanding

  where parties can even act on a nod or a wink.

• The CCI observed that due to the clandestine nature

  of such dealings, the evidence of the existence

  of an agreement must be referred from the number

  of coincidences and indicia in the relevant market.

  In the present case, there were multiple occasions where the FSC rate was changed by the airlines

  either on the same day or within a short period

  of each other. Moreover, the quantum of change was

  identical.

• The CCI rejected the plea of the airlines that the

  FSC rates were directly proportional to the fluctuations

  in the rates of Air Turbine Fuel (“ATF”) and the

  US Dollar. The CCI commented that this rationale

  defied logic since, as per the data provided, the FSC

  was found to be increasing even on days when the ATF

  and USD were decreasing, that too in a synchronized

  manner.

• The airlines had admitted before the DG that

  agents handling over 80% of their businesses were

  common and acted as an effective channel for transfer

  of information. This reaffirmed the CCI’s finding that

  price-sensitive communication was exchanged between

  the airlines.

Decision

• The CCI held the tacit coordination amongst the

  airlines to be an agreement that has and/or is likely to

  cause an appreciable adverse effect on the competition

  in India thereby violating Sections 3(1) and 3(3)(a) of

  the Act.

• The CCI directed the airlines to cease and desist

  from acts, which are found to be in contravention of

  the Act.

• As regards the quantum of penalty, the CCI, relying

  on Supreme Court’s ruling in Excel Crop Care Limited

  vs. CCI & Ors. [(2017) 8 SCC 47], held that adopting

  a criteria of ‘relevant turnover’ for the imposition of

  penalty under Section 27(6) of the Act will be more

  in tune with the ethos of the Act. Consequently, the

  quantum of fine was revised from 10% of their average

  turnover for the last three financial years to 3% of their

  average turnover earned from the levy of the FSC on the

  volume of cargo handled during the last three financial

  years, i.e., '39.81 crore on Jet, '9.45 crore on Indigo and

  '5.10 crore on Spice Jet.

Analysis

Even though this judgment holds the airlines liable for

anti-competitive practices, this is a glaring case of abuse by collectively dominant firms. Domain experts have long

been craving an amendment to Section 4 so as to widen

the scope of the word “group” to include independent and

unrelated entities, operating in the same market, whether

or not connected through a common link (shareholding

etc.) cumulatively holding a dominant position in the said

market. Previous proposals to amend Section 4 by adding

the words “singly or jointly” have not yet seen the light of

the day.

That being said, for an economy aspiring to improve

its private investor sentiment, this judgment comes

as a much-needed step in the right direction. It may

be worth mentioning that despite being a “free-market”

economy, many of India’s key sectors are heavily

oligopolized. If recent trends are to be considered,

then the market share of the top three companies

in their respective sectors in India has seen an

astronomical rise, i.e., from 40% (2001 to 2007) to 65%

(2007 to 2016). A better climate for sectoral entrants

(both domestic and foreign) would be quintessential to

India’s pursuit of becoming a global economic power in

times to come.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.