Jurisdiction - India
Reports and Analysis
India – Potential Conflict Between CCI And Airline Sector Regulator.

23 October, 2013

 

Legal News & Analysis – Asia Pacific – India – Competition & Antitrust

 

In little over four years of operation, CCI has earned the reputation of being an aggressive regulator. That CCI has not shied away from levying significant penalties on some of the largest Indian companies has helped it emerge as the first amongst other seemingly equal sector-specific regulators. Increasingly, we hear the clamour for CCI to examine issues which, thus far, were left to sectoral regulators. The issue of airline ticket pricing is one such example. Any hike in airline ticket prices is, almost inevitably, followed by a call for CCI action. Reportedly, the Air Passengers Authority of India has approached CCI, alleging that the recent price increase by domestic airlines reeks of collusion. This is the ninth occasion in the last four years that CCI has been called upon to inquire into pricing and other such commercial decisions in the Indian airline industry. Each time CCI receives a complaint, the question of possible conflict between CCI and the regulator for the aviation sector, the Directorate General of Civil Aviation (‘DGCA’) come to fore.


CCI’s mandate is to regulate competitive conditions in the Indian market for all goods and services. In other words, CCI is responsible for promotion and protection of competition in the economy as a whole. DGCA, in comparison has a limited mandate. It is responsible for regulation of air transport services in India and enforcement of civil air regulations, and air safety and airworthiness standards.


The Act empowers CCI to prohibit collusive price fixing arrangements. Equally, if a dominant enterprise abuses its position, including by charging ‘unfair’ or ‘discriminatory’ prices, CCI can intervene to prohibit the practice and levy penalties. The Aircraft Rules, 1937 (‘Aircraft Rules’) provide similar powers to DGCA. Specifically, Rule 135 of the Aircraft Rules empowers DGCA to monitor airline tariffs and issue appropriate directions if it finds that any airline operator “has established excessive or predatory tariff or has indulged in oligopolistic practice”. To help DGCA monitor airline tariffs, the Aircraft Rules require all airline operators to publish the details of the tariffs, including the total amount payable by a passenger and a complete breakup of the total amount, indicating the fare, fees or any other charges. Recently, DGCA issued directions to airlines to furnish and publish route-wise and fare category-wise tariffs on a monthly basis, purportedly to keep the passengers informed of the pricing patterns of airlines.


First, DGCA’s direction on disclosure of tariffs a month in advance could end up defeating CCI’s objective of protecting and promoting competition in the market. Unlike other industries, pricing decisions in the airline industry are constrained by two factors: (a) the product or service which is an airline seat is time dated or expires on a particular date; and (b) the capacity is fixed well in advance and can be augmented only at a very high marginal cost. These characteristics create the potential for very large variations in the opportunity cost of sale, because opportunity cost of sale is a foregone potential subsequent sale. The value of one airline seat in a shortage situation would be the highest price that an un-served customer may be willing to pay. Forecasting this value, given the sales figure, and available capacity on a certain date and time, represents dynamic pricing and forms the bed rock of competition in the airline sector. DGCA’s direction, requiring disclosure of route-wise and category-wise fares well in advance would defeat the very notion of dynamic pricing. Denying airlines the opportunity to determine prices on an ongoing basis would in turn make the market less competitive, and perhaps be inimical to the competition law principles that CCI is required to uphold. In fact, in previous inquiries on allegations of cartelization in air ticket pricing, CCI has rightly recognized that the dynamic price discovery mechanism adopted by the airline operators constitutes an important aspect of competition in the market1. CCI’s endorsement of the dynamic pricing mechanism adopted by airline operators as a factor which promotes competition appears be in stark conflict with DGCA’s direction to disclose prices in advance.


Second, the manner in which DGCA interprets the terms ‘excessive price, ‘predatory price’ and ‘oligopolistic practice’ could again lead to conflict with CCI. DGCA has not yet clarified the meaning of these terms. Neither do the Aircraft Rules define these terms. Unlike the Aircraft Rules, the Act contains an express definition of the term ‘predatory pricing’ and seeks to cover ‘excessive pricing’ within the ambit of ‘unfair or discriminatory’ pricing. On the issue of ‘excessive prices’, CCI has indicated that there cannot be any threshold limit for determining whether a price is excessive. In Kapoor Glass v. Schott Glass India Private Limited2, by not refuting DG’s observations, CCI indirectly acknowledged that the price that a customer is willing to pay would depend on the value he ascribes to a product, and nothing can be said to be excessive till such time there are buyers willing to pay the price of a product. In other words, the price of a product may be ‘excessive’ if it has no co-relation with the value of the product, as perceived by the customers.


If we take the example of CCI’s likely approach to interpreting the term ‘excessive’ prices in the airline sector, the key would be to ascertain the ‘value’ of a seat on a given date and at a particular point of time that a customer in need of a ticket would ascribe to it. As discussed earlier, the ‘value’ of an airline seat would vary depending upon an airline operator’s assessment of the price of a ticket given its sales figures and available capacity on a certain date and time. This value cannot be assessed if the regulators do not recognize the uniqueness of the industry and the relevance of dynamic pricing policies that each operator follows. DGCA’s direction that airline operators disclose their ticket prices a month in advance means that when called upon to examine whether ticket prices are ‘excessive’ it is unlikely to acknowledge that prices result from an operator’s assessment of the value of a ticket as perceived by potential customers on a certain date and time. Such an approach may well be contrary to CCI’s approach and competition law best practices.


The above discussed examples of divergence in approaches to regulation between CCI and DGCA, if not addressed, will lead to uncertainty and policy incoherence. CCI and DGCA must address this quickly, leaving no opportunity for ambiguity. One way of doing so would be to use the ‘reference mechanism’ contained in Section 21 of the Act, which allows DGCA to seek CCI’s opinion while dealing with an issue which could contravene the provisions of the Act. Similarly, CCI can also seek DGCA’s opinion on an issue which it thinks could raise competition concerns in the airline sector. The use of the reference mechanism will not only minimize the possibility of conflict between CCI and DGCA, but also help these bodies take more coherent decisions. In the meantime, CCI’s decision in Mr. Manjit Singh Sachdeva v. DGCA and Ministry of Civil Aviation3 where it refused to don the mantle of a tariff regulator provides the airline industry much relief. When called upon to assess whether DGCA’s failure to implement a formal mechanism to determine air ticket prices is anti-competitive, CCI expressly stated that it can neither determine nor fix the price of any product or service. CCI also observed that directing DGCA to fix airline tariffs would be contrary to the spirit of the competition law. DGCA must take note of this decision and leave the task of tariff setting to individual airline operators.

 

Endnotes

 

1 In Re: Domestic Airlines, Reference Case No. 1 of 2011
2 Case No. 22 of 2010.

3 Case No. 68 of 2012.

 

 

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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