India: CCI Penalises Domestic Airlines For Anti-Competitive Practices

INTRODUCTION

Express Industry Council of India, a non-profit company filed an information under Section 19 (1)(a) of the Competition Act, 2002, against Jet Airways India Ltd., IndiGo Airlines, SpiceJet Ltd., Air India Ltd. and Go Airlines India Ltd. alleging, inter alia, collusion in fixing of Fuel Surcharge (FSC) rates for cargo transportation by the domestic airlines and thereby, contravening provision under Section 3 (Anti-Competitive Agreements) of the Act. In May 2008, certain domestic airlines in India connived to introduce a 'Fuel Surcharge' (FSC) for transporting cargo. This surcharge was fixed at a uniform rate of Rs. 5/kg and came into force on May 15, 2008.

AVERMENTS

It was averred that there was no legal provision under which such FSC could have been levied by the airlines and the same was introduced for the ostensible reason of mitigating volatility of fuel prices. Further, the very fact of levying FSC at a uniform rate from the same date itself constituted the act of cartelization. It was also an admitted fact that when fuel prices were reduced there was no corresponding decrease in FSC; instead FSC had increased in the past even without any corresponding increase in fuel prices. This increase adversely affected the consumers who bore the ultimate burden of price rise.

OBJECTIONS

The main objection taken by the airlines was the lack of evidence to show the existence of an agreement or exchange of information regarding prices between the airlines. It was also stated that the airline industry is an oligopolistic market and there is interdependence between market participants due to which price parallelism is a normal result of the market structure. It was also pointed out that all companies admitted that agents appointed by the airlines are a crucial link in providing market feedback as these agents are common for various airlines. These agents thus act as an effective channel for transfer of information from one airline to another. It was also contended that freight tariff is highly variable, which is decided on basis of several factors like existing demand, existing flight capacity, total distance traveled by flights, flight timings, etc.

CONCLUSION

The Commission considered all the contentions raised by the airlines in detail. It was noted that the definition of 'agreement' as given in Section 2(b) of the Act, required any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings. The understanding may be tacit and covers situations where the parties act on basis of a nod or wink as well. It was noted that it is not necessary that cartels must operate in a symmetric manner and more often than not attempt would be made to hide the coordinated behavior to try and mislead the authorities. On the contention of the airline industry being an oligopolistic structured market, it was noted that while it is normal for one firm to change its price while following the price increase by another, parallel pricing alone cannot be the sole factor establishing anti-competitive behavior. The airlines had been unable to justify why such coordinated behavior in cargo prices should spill over FSC rates as the fuel consumption would vary not only based on cargo handled but also on passenger miles handled by each of the airlines. While considering the issue of common agents, the Commission noted that to have an edge over other competitors a player will have an incentive to hide any change in its price. Further, an increase in price may affect consumers and hence any collusion will only be profitable for the airlines. The airlines had associated random factors to FSC prices without having a systematic mechanism to arrive at the prices.

In view of the foregoing, it was opined that the three airlines – Jet Airways, IndiGo and SpiceJet, had acted in a concerted manner in fixing and revising the FSC rates and thereby, contravened Section 3 of the Act. The Commission however did not deem it appropriate to proceed against Air India and Go Airlines. It was noted that Go Airlines gave its cargo belly space to third party vendors to undertake cargo functions and had no control on any aspects of cargo operations done by its vendors including imposition of FSC. In relation to Air India, it was noted that when there was a substantial decline in fuel costs, the fuel surcharge was withdrawn by them. As against the remaining three airlines, while taking into account the average turnover of the airlines, and also the fact that the airlines had been incurring losses, the Commission imposed a penalty of 3% on the average turnover earned from the levy of FSC on the volume of cargo handled during the last three financial years to the tune of Rs. 39.81 crores on Jet Airways, Rs. 9.45 Crores on IndiGo Airlines and Rs. 5.10 crores on SpiceJet Ltd. under provisions of Section 27 of the Act.

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