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India – CCI Clears Acquisition Of 24% Stake In Jet By Etihad.

4 December, 2013

 

 

On November 12, 2013, the Competition Commission of India (‘CCI’ or ‘Commission’) cleared the proposed acquisition of a 24% equity stake in Jet Airways (India) Limited (‘Jet’) by Etihad Airways PJSC (‘Etihad’) (collectively, the ‘Parties’), pursuant to an Investment Agreement (‘IA’), a Shareholders Agreement (‘SHA’) and a Commercial Cooperation Agreement (‘CCA’). The Parties further submitted a Corporate Governance Code that they agreed to adopt pursuant to the SHA.


The acquisition of the 24% equity stake allows Etihad to nominate two out of the six shareholder directors, including the Vice-Chairman, on the board of directors of Jet. Further, under the CCA, Jet and Etihad have agreed to frame co-operative procedures in relation to, (i) joint route and schedule coordination; (ii) joint pricing; (iii) joint marketing, distribution, sales representation and cooperation; (iv) joint/reciprocal airport representation and handling; and (v) joint/reciprocal technical handling and belly-hold cargo and dedicated freight capacity on services (into and out of Abu Dhabi and India and beyond). The Parties intend to establish centers of excellence either in India or Abu Dhabi, and Jet would use Abu Dhabi as its exclusive hub for scheduled services to and from Africa, North and South America and UAE. Jet would refrain from entering into any code sharing agreement with any other airline that has the effect of, (i) bypassing Abu Dhabi as the hub for traffic to and from the above locations; or (ii) is detrimental to the co-operation contemplated by the CCA. Finally, Etihad can recommend candidates for the senior management of Jet.


A. Relevant Market


While defining the relevant market for the proposed transaction, CCI used the origin and destination (‘O&D’) method. The Commission opined that consumers often consider direct flights and indirect flights as substitutable depending upon various factors such as the type of passengers (time-sensitive or non time-sensitive), duration of flight, connecting times and flight schedules and prices. CCI concluded that for the purposes of substitutability, indirect flights operated by rival airlines can be considered a viable alternative.


CCI also considered the international airports in Sharjah, Dubai and Abu Dhabi as substitutable. Not only are these destinations two hours from each other, but Etihad and Emirates provide a free shuttle services between Abu Dhabi and Dubai, in addition to other modes of public transport that are also available.


On the basis of the above discussion, CCI concluded that the relevant market should be the market for international air passengers:


(a) on the O&D pairs originating from or ending in 9 cities in India (Kochi (COK), Bombay (BOM), Hyderabad (HYD), Thiruvananthapuram (TRV), Bangalore (BLR), Kozhikhode (CCJ), Ahmedabad (AMD), Delhi (DEL) and Chennai (MAA)) to/from United Arab Emirates (‘UAE’);


(b) on the O&D pairs originating from or ending in India to/from international destinations on the overlapping routes (routes on which both Jet and Etihad operate flights on) of the parties to the combination.


B. Competition Assessment


CCI’s analysis of the proposed acquisition was based on the market share of Jet and Etihad on the nine O&D city pairs being less than 36%, as well as the stiff competition they face from other airlines on these routes. Based on concerns expressed by Air India, CCI conducted a competition assessment analysis of each of these nine O&D city pairs. CCI concluded that indirect flights on each of these nine city pairs along with airport substitutability and the presence of Air India on some of these routes provided sufficient competitive constraints. Moreover, the Commission noted that Air India is likely to increase its services on the Mumbai-Abu Dhabi and Delhi-Abu Dhabi routes, which would mitigate any potential apprehensions on reduced competition.


Further, there are 38 routes to/from India to other destinations on which both Jet and Etihad operate. On each of these routes, there is at least one major competitor, apart from Jet and Etihad, which can not only constrain the pricing behaviour of the Parties, but also provide a wider selection to passengers.


In addition to the O&D approach, CCI also analyzed the network effects of the proposed combination. The Commission considered the potential effect of the proposed acquisition on other airline systems (alliances or strategic equity partnerships between two airlines), and concluded that a high market share of a hub airline in a point-to-point O&D city pair does not imply the absence of competition. It would only mean that the competition would be present from alternative networks and alliances.


CCI considered the potential anti-competitive effects that would have arisen on account of the CCA which required Jet to (i) use Abu Dhabi as the exclusive hub for its scheduled services to and from Africa, America and the UAE; and (ii) cancel its code-share agreements with other airlines in order to flow its traffic through Abu Dhabi. CCI found that on all those routes that would be thus affected, Jet had a negligible market share. In fact, the new relationship with Etihad would allow Jet to increase capacity, thereby providing increased choice to Indian consumers.


The Commission stopped to note the potential efficiencies the proposed acquisition would create, including improved capacity utilization, lower transaction costs, and lower fares for passengers travelling to smaller cities in India through the nine cities served by Etihad. The ability to operate larger, more efficient aircrafts would allow the parties to optimize their economies of scale. The transaction would also mean better service, in terms of ticketing, seat selection, airport lounges, gate location for connecting services etc., not to mention the much needed equity infusion into Jet, which is beleaguered with debt.


CCI also pointed out that the regulatory framework which prevents Indian airlines from launching international services before completing five years of domestic operations is likely to be relaxed, improving the competitiveness in the Indian aviation sector.


C. Impact Of BASA


It was also noted that under the India-UAE Bilateral Air Services Agreement (‘BASA’) 24,330 seats are currently allowed to be operated between India and Abu Dhabi and that this number will increase to 50,000 seats by 2015. CCI noted that the forecasted market share of Jet and Etihad (after assuming the increased number of seats for Jet) is 22%, which would not be enough to exploit any market power.


In light of the above, CCI was of the view that the proposed acquisition was unlikely to have any appreciable Adverse Effect and approved the same under Section 31 of the Competition Act.


D. Dissenting Opinion


Anurag Goel, Member, CCI did not agree with the majority order. In his dissenting opinion, Mr. Goel wrote that CCI has not had the time to either test the veracity of the information submitted by the Parties or ask for additional information from other airlines, airports or consumers.


He defined the relevant market as the ‘market for international air passengers to and from India’. Based on the information available, Mr. Goel noted that post-acquisition, the market share of the Parties in the relevant market is likely to rise to 25% which is significant enough to cause an Adverse Effect. His analysis included the weakening position of Air India based on its present state of financial distress, to the extent that it would not be able compete effectively in the relevant market.


His dissent took note of the combined market share of the Parties for air traffic between India and North America, which at present is 42%, and post-combination, could make them the largest carrier on this route. Further, the competition between Jet and Etihad on several routes such as India-Toronto and India-Newark would no longer exist post-combination, and could discourage Jet from launching new routes that are currently served by Etihad.


The dissenting order did not agree with the analysis of the majority that Abu Dhabi, Dubai and Sharjah were substitutable airports. In fact, it identified competition concerns in the following O&D pairs: Mumbai-Abu Dhabi, Delhi-Abu Dhabi, Mumbai-Dubai, Delhi-Dubai and Kochi- Sharjah. Mr. Goel rejected the argument that the proposed acquisition would result in potential efficiencies, deeming them merely qualitative and not quantitative.


Finally, in his dissent, he noted that Jet had leased three of its slots at London Heathrow to Etihad for a period of five years subject to certain conditions, including the right to terminate. He observed that Etihad may prefer to use these slots itself thereby reducing the frequency of flights operated by Jet between India and London Heathrow.

 

AZB For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com


Shuva Mandal, AZB & Partners 
shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com


Percy Billimoria, AZB & Partners 
percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

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