India: Competition Commission Of India Imposes Penalties On Three Major Airlines For Cartelisation

Last Updated: 9 December 2015
Article by Agram Legal Consultants

The Competition Commission of India ("CCI") by its recent ("Order"), levied penalties of `1,516,900,000 (Indian Rupees One billion five hundred sixteen million nine hundred thousand), `637,400,000 (Indian Rupees Six hundred thirty seven million four hundred thousand) and `424,800,000 (Indian Rupees Four hundred twenty four million eight hundred thousand) on Jet Airways (India) Limited ("Jet Airways"), InterGlobe Aviation Limited (operators of 'IndiGo Airlines') and SpiceJet Limited ("SpiceJet") (collectively "Airlines") respectively, for indulging in anti-competitive activities. The CCI found the Airlines indulging in 'concerted action' in Fixing Fuel Surcharge rates ("FSC"), in contravention of the Competition Act, 2002 ("Competition Act"). The complaint against the Airlines, which included the names of Air India Limited ("Air India") and Go Airlines (India) Limited ("Go Air") was filed with the CCI by Express Industry Council of India ("EICI"), an apex body representing the welfare of entities in the express industry. The CCI considering the precarious position of the airlines business imposed the penalties at 1% (one percent) of the Airlines' average turnover of the last 3 (three) financial years. Salient features of the Order are summarised below:

1. It was alleged by EICI that the Airlines were levying the FSC at uniform rates and on the same dates, constituting an act of cartelization. FSC was ostensibly introduced as an extra charge linked to air turbine fuel ("ATF") prices and FSC was increased with the increase in ATF prices, however the Airlines did not decrease the FSC on decrease in ATF prices.

2. The CCI vide its order on September 2, 2013 had directed for a Director General's Report ("DG Report") to look into the allegations against the Airlines. The DG Report concluded that allegations against the Airlines could not be proved and they did not indulge in anti-competitive activities during the period 2008-2013. Having said that, the DG did note that, although no evidence of collusion was found between the Airlines during the course of investigation, behaviour of the Airlines with respect to imposition of FSC was not to be in conformity with market conditions where the domestic players were actively competing. Further, the FSC was found to be used by the Airlines as a revenue smoothening levy that bore little correlation with changes in ATF price when FSC was introduced to address the sharp volatility in ATF prices.

3. EICI in response to the DG Report stated that the findings of the DG Report were not warranted as there was a great disparity between, what the DG had found and what the DG had concluded, as the DG Report had concluded that there was 'concerted action' between the Airlines in 2012, however, this finding was abandoned in the final conclusion of the DG Report.

4. In response to the allegations made, the Airlines submitted that the revenue collected from charging FSC was of a minimal percentage and therefore there was no sufficient incentive for cartelization. The Airlines further contended that mere price parallelism could not indicate collusion as the air cargo industry is not only competitive but is also oligopolistic in nature. Further market shares of the market players are continually fluctuating, which would indicate an absence of collusion.

5. In its analysis the CCI observed, that FSC did in fact account for a substantial component of the overall price for cargo services and therefore possibility of cartelisation could not be ruled out. Moreover, the Airlines were unable to justify the increase in FSC when ATF price was constant.

6. In conclusion the CCI in its Order, found the Airlines to have acted in collusion for determining FSC and were thereby controlling air cargo transport, and therefore directed the Airlines to cease and desist from such conduct. However, considering the poor market scenario of the airlines industry and the adverse effect the penalty may have on the end-consumer/ economy, CCI significantly reduced the penalty from what was originally intended. Air India and Go Air were not found in contravention of the Competition Act, as CCI found Air India's conduct to not be parallel with those of the Airlines while Go Air did not directly operate as cargo carrier and had assigned the business of transporting cargo to cargo agents over which Go-Air had no control.

The CCI has the discretion to impose a penalty of 10% (ten percent) of the average turnover over the last 3 (three) preceding financial years, or 3 (three) times the profit for each year of continuance of contravention, in case of cartelisation. Considering the seriousness of the offence and also to deter airlines from indulging into anti-competitive behaviour, CCI found it pertinent to impose heavy penalty on the Airlines. However due to the current scenario of the debt ridden airlines market, the CCI relaxed the penalty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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