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May 09, 2018

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Oligarchs Beware: The CCI is Watching!


- Arush Khanna, Partner [ Trinaya Legal ]
- Divya Aggarwal, Associate [ Trinaya Legal ]

arushkhanna_divyaaggarwal

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.

A penalty equivalent to three percent of the average turnover earned from the levy of the fuel surcharge on the volume of the cargo handled by the Airlines during the last three financial years was imposed on Jet, Indigo and SpiceJet

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.

1. Express Industry Council of India Vs. Jet Airways (India) Ltd. & Others, 30 of 2013

 

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


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