By:Ansruta Debnath
INTRODUCTION
On 1st September 2023, the Competition Commission of India (hereinafter ‘CCI’) approved the merger of Vistara and Air India Limited, the merged entity retaining the name of Air India Limited (hereinafter ‘AIL’). This is the third major step of Tata Son Private Limited’s (hereinafter ‘Tata’) ongoing drive to consolidate its civil aviation holdings, which started from its 100% acquisition of Air India from the Government of India, followed by the acquisition of AirAsia India by Air India, the latter being rebranded as AIX Connect Private Limited (hereinafter ‘ACPL’) which was later merged in 2023 into Tata’s Air Asia Express Limited (hereinafter ‘AIXL’). The new AIXL will, thus, operate as a single low-cost airline under AIL, while AIL itself, the newly merged entity, will become a single full-service carrier.
While Tata wholly owned the erstwhile AIL, it had a 51% stake in Vistara, a joint venture between it and SIA Group. As it stands post-merger, SIA, with an investment of INR 2058.50 Crore, now has a 25.1% stake in the merged entity, with Tata retaining the remaining. Accordingly, Tata is now the controlling authority of one of the largest airlines in the country by eliminating four independent airlines and making one mega-entity, i.e., AIL.
UNDERSTANDING INDIAN CIVIL AVIATION MARKETS
The civil aviation market in India has been an oligopoly- the primary players being Air India (with Vistara and AirAsia), Indigo, SpiceJet and Go First (previously GoAir). Indigo has been a dominant market player for quite some time. The merged entity is now set to become its biggest competitor, making it very likely that the market in India will slowly convert to a duopoly. This is primarily because of the high fixed operational costs and sunk costs that create market entry barriers. Further, this capital-intensive market has also been characterised by aggressive pricing by dominant players, making it difficult for players to sustain themselves in such a dynamic market. Furthermore, the tanking SpiceJet stocks and Go First’s voluntary insolvency proceedings show how difficult it is to survive in this market.
An important peculiarity of the airlines market is the cost of the network structure, i.e., the linkages and routes through which aeroplanes operate, which are driven by economics of scope (where travellers of different routes are combined for at least one part of their journey), economics of density (depends on aircraft sizes) and the route length. This cost has a significant impact on overall revenue. It has been observed that costs can go down due to higher traffic densities in Hub and Spoke Network Operations (when multiple locations are connected to a hub) rather than point-to-point operations (all locations are connected). This peculiarity, in turn, influences the type of services that airlines provide, with larger networking being more efficiently offered and managed by allied airlines like the merged entity, which ultimately benefits the consumer.
AECC CONCERNS AND VOLUNTARY COMMITMENTS
Aviation market delineation in the present CCI order was done at the level of Origin & Destination (hereinafter ‘O&D’) pairs, i.e., checking market concentrations in routes between the departing and arriving cities. This necessitated identifying routes where Air India and Vistara had overlaps. In the domestic scenario, it was observed that among the identified routes, combined market shares ranged from 85% (Delhi-Thiruvananthapuram) to 45% (Delhi-Goa, Bombay-Hyderabad etc.). Thus, based on passengers travelled, the merged entity’s market share was higher than 50% in almost all domestic O&D pairs, while it was between 40-50% in 16 domestic O&D pairs.
In the international routes, almost a 100% market share was seen in the Bombay-Singapore and Delhi-Singapore routes. In general, considering direct and one-stop flights as substitutable, the CCI found almost 50 per cent market share in most international routes. The market shares of the domestic and international routes were also seen to strengthen their position in the charter flights market and cargo flights market.
Accordingly, the market concentrations made a prima facie case of Appreciable Adverse Effect on Competition (hereinafter ‘AAEC’). So, a Show Cause Notice under Section 29(1) of the Competition Act, 2002, was issued to the notifying entities. The responses from the notifying entities highlighted why an investigation should not be conducted, cited reasons for the high revenue requirement for sustaining in the market, and the losses incurred by both Vistara and Air India that necessitated the merger. It emphasised Indigo being a strong market player and that at least 4-5 players in the market showed low entry barriers. It further stated that market concentration analysis based on HHI indicators (which the CCI did) was irrelevant and that the merged entity had high market shares only in a few routes, for which they proposed modifications.
Under Regulation 25(1A) of the 2011 Combination Regulations, notifying entities might provide voluntary modifications to their proposed merger. Accordingly, the merged entity has made voluntary commitments to maintain minimum annual scheduled air passenger transport capacity for the domestic and international routes with concentrated market share, respectively. The commitments would continue for four years, and an independent auditor would be appointed to check on the adherence to these commitments.
ANALYSIS OF ARGUMENTS AND CCI’S OBSERVATIONS
The CCI was satisfied with the voluntary commitments, making the merged entity maintain a “minimum capacity” regarding its AAEC concerns due to the market concentrations in certain O&D pairs. However, it is unclear what this “minimum” will be.
A key concern that the CCI had highlighted in its prima facie report was the potential formation of a monopoly in the business class segment, the merged entity being the only provider of business class service in the country. However, the CCI then agreed to the argument of the notifying parties that it is a declining domestic market segment because low-cost carriers (hereinafter ‘LCC’) provide add-on services that match the services provided in business class. It is unclear, however, whether the CCI considered business class to be substitutable by LCCs or whether its consumers are such a small percentage that they do not qualify to be categorised as a separate market.
Further, the CCI discounted its argument of entry barriers by the examples of Akasa, TruJet and Fly91, who are new entrants in the market and set to provide competitive constraints against the merged entity. The CCI, however, acknowledged that the biggest competitive constraint should be supplied by Indigo, which will prevent the merged entity from indulging in unliteral price increase and also was assuaged by the argument that they would not be able to reduce capacity due to slots that are allotted from the airports according to market strength. Finally, CCI emphasised the increased consumer benefits that allied airlines, such as the merged entity, can provide while operating hub and spoke networks, which most airlines prefer.
CONCLUSION
Only time will tell whether the two airline giants will allow new entrants in the market to thrive. The merging entities also used SpiceJet as an example of a competitor, but it is true that this airline has been suffering in the market and is unlikely to survive. Further, given that the merging entities were essentially arising from a single economic entity, i.e., Tata, it might be correct to say that the entire process was merely a formality. Despite reducing competitors in the market to essentially two, the CCI’s priority has been to ensure consumer benefit, and the same was reflected throughout the approval. However, in the duopoly, if the merged entity fails, especially given the losses that Vistara and Air India have individually made necessitating the merger, then the CCI will have a very different problem at hand.
(Ansruta Debnath is a law undergraduate at National Law University Odisha. The author may be contacted via mail at ansruta.debnath@gmail.com )
Cite as :Ansruta Debnath, Unveiling the Antitrust Dynamics of the Air India-Vistara Merger, 1 March 2024,<https://rmlnlulawreview.com/2024/03/01/unveiling-the-antitrust-dynamics-of-the-air-india-vistara-merger/>date of access.
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