A Multifaceted Examination of the Ramifications from CCI’s Approval of the Air India and Vistara Merger

[By Arjun Kapur & Akash Hogade]

The authors are students of National Law University, Mumbai.

 

Introduction

As airlines look to streamline operations and cut costs, mergers between airlines are becoming more frequent. However, as fewer competitors mean higher prices and poorer customer service for consumers, airline mergers can also raise concerns about the state of the market. The Competition Commission of India (CCI) enforces India’s competition law. When assessing an airline merger, the CCI considers various factors, such as how will it affect consumer demand, competition, and the aviation sector as a whole. This raises several potential competition issues, including decreased competition on domestic and international routes, the foreclosure of competitors, and increased airline coordination.  On September 1, 2023, the CCI approved the merger of Air India and Vistara, subject to a few conditions. The requirements address the concerns about competition that the merger and the market participants in the airline industry have raised. The effects of the merger on consumer welfare and airline industry competition in India are still being felt. However, the merger’s approval by the CCI is expected to significantly affect the Indian aviation industry.

In this blog post, we’ll discuss the potential competition issues raised by the merger of Air India and Vistara. We’ll look further at the merger from a wider angle, considering what airline mergers mean for competition law and the global aviation sector. The aviation sector is at a critical juncture where it must carefully balance the benefits of market competition with the need for consolidation. The CCI’s decision will influence the industry’s future landscape and create a standard for similar mergers and acquisitions.

Impact on Competition in the Indian Context

The recent merger that the CCI has approved has certain complications that the competition watchdog should have considered. These complications include an adverse effect on competition in the aviation sector. The Competition Act, 2002 (The Act) under S.20 enumerates the factors the commission should consider while approving any combination. The factors determining the appreciable adverse effect on competition (AAEC) in the aviation sector were not considered by the CCI. This merger of two big giants owned by the same parent company (Tata Group) has the potential to affect the prices of air tickets and create barriers at the entry level of the market, which will be the second most significant player in the aviation industry after Indigo in terms of market share. The resulting merger will also have India’s leading airline with a fleet of 218 aircraft.

S.20 lists factors which will affect the competition in the market. The merger has the potential to restrict rapid expansion and create entry barriers. The fact that there are very few players in the domestic aviation market leads to very restricted competition. In this close-knit competition, the merger is seen as a giant that stops new players from entering the market. The fact that the merger will acquire a large percentage of passengers and fleet will discourage players from entering the market.

The domestic aviation industry has only ten players in the market after GoFirst declared bankruptcy. The aviation industry is also prone to many external factors that affect any airline’s stability. There have been many instances in the past where many airlines have declared insolvency and left the aviation industry. The merger will also have the possibility of other airlines failing, an apparent factor under S.20 that causes AAEC. The merger will acquire a significant share of the market, which affects other airlines and might affect the stability of other players. The CCI did not investigate these possibilities to allow the merger. The Competition watchdog invoked the doctrine of necessity to approve the merger. The doctrine has been invoked because there is no necessary quorum existing in CCI. These mergers, which potentially might affect the airline industry and the CCI by invoking the doctrine of necessity, also show an escapist attitude on their part. The competition watchdog also faltered by basing that there will be no entry barriers only on the example of Akasa Air. The assumption that the merger will not create entry barriers just because Akasa Air could manage to set foot right in the industry is also flawed.

The merger has been approved, provided both companies have fulfilled their commitments. The commitments given by both companies have been enumerated in the annexures attached to the report. These commitments are also subject to certain limitations, which have been enumerated in the order. There are ten limitations listed by both companies wherein they won’t be able to fulfil the commitments. CCI has ignored the possibility of non-fulfilment of the commitments under limitations. There is no strict interpretation of these limitations; this gives the companies an enormous scope to have an ambiguous interpretation of them and not fulfil their commitments. The fact that CCI has approved this merger and overlooked the restrictions imposed on the conditions showcases the prematurity of the decision. A possible scenario would have been  if the companies falter and do not fulfil their obligations after the merger, it would be excruciatingly difficult for CCI to undo a herculean merger. A viable path that should have been taken by the CCI would be to see whether all commitments have been fulfilled by the companies first and then approve the merger. These possibilities had to be considered by the CCI, considering the ramifications of the merger showcasing that CCI has committed a grave error in approving the merger.

Analyses of the Global Airline Merger Market

The merger is likely to have a significant impact on the competitive environment and change how Indian airlines operate around the world. Globally, competition authorities are approaching airline mergers with more scepticism. This is a result of various factors, concerns about how mergers will affect prices, choice, and innovation are fueled by the airline industry’s growing concentration, the dominance of a small number of major airlines on specific routes and markets, and the growing dominance of these airlines.

In several cases involving airline mergers in recent years, regulators have either demanded concessions or blocked the mergers. For the consumers, the competition regulators are paying more attention to airline mergers. Making sure that mergers do not result in higher costs, fewer options, and less innovation is crucial. Global airline mergers have had a significant effect on competition law.

There has been a wave of industry consolidation in recent years, with several significant mergers. Regulators are concerned that mergers reduce competition and drive up consumer prices.

In 2013, the US Department of Justice (DOJ) prevented the proposed merger of US Airways and American Airlines. The DOJ was worried that the merger would have increased costs and limited consumer choice on some routes. 2017 saw the European Commission (EC) conditionally approve Qatar Airways and British Airways’ proposed merger. The EC was worried that the merger might have increased costs and limited consumer choice on some routes. The EC concluded that the merger’s advantages, such as cost savings and network expansion, outweighed any potential adverse effects on competition. The industry is cyclical, and the Gross Domestic Product directly impacts its performance. Given this situation, the airline industry’s M&A activity is anticipated to increase. Industry players have previously engaged in price wars and unprofitable network expansion to increase their market share. Companies in the sector concentrate on improving their profitability, especially in markets with a strong presence, rather than engaging in competition and turf wars. Stakeholders in the airline industry globally are gradually adopting mergers, joint ventures, and other strategic alliances as the norm as they focus on cost reduction and excess capacity reduction to combat rising fuel prices and the recession.

Conclusion

In conclusion, the recent approval of the merger between Air India and Vistara by the CCI has raised significant concerns about competition in the Indian aviation industry. While the CCI did place certain conditions on the merger, it may not be enough to address the potential adverse effects on competition in the market. This highlights a lackadaisical attitude in the regulatory body and raises questions about the thoroughness of the approval process.

Moreover, the reliance on commitments from the merging companies, subject to certain limitations, introduces uncertainty regarding fulfilling these commitments and the ability to undo the merger in case of non-compliance. CCI approved the merger in a rush to privatize Air India and save “taxpayer’s money” before the upcoming election. Ironically, saving taxpayer money will inevitably lead to them spending too much on air travel in the near future due to a complete lack of competition in the domestic airline market. Therefore, at this stage, the government’s assurances of affordable air travel under ‘Ude Desh ka Aam Nagrik’ are unreliable and undependable.

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