Civil Aviation and Competition by hedongchenchen


									 Civil Aviation And

Table of Contents
                                          Page No.
Growth Drivers
Types of Air Services
Competitors in Indian Aviation
2011 Market Shares Of Domestic Carriers
Importance of Competition
Competition Issues in Civil Aviation
Competition Issues in Indian Aviation

Karan Shetty                                     Page 1
Civil aviation plays an integral role in development of an economy. It
helps in realizing the socio-economic objective of providing
connectivity to foster travel & trade. Airline Industry in India is one of
the fastest growing aviation industries in the world. With the
liberalization of the Indian aviation sector, airline industry in India has
undergone rapid transformation. At the time of independence the
number of companies operating within and beyond frontiers of the
country was 8 namely: Tata Airlines, Indian National Airways, Air
service of India, Deccan Airways, Ambica Airways, Bharat Airways
and Mistry Airways.

The Air Corporations Act, 1953, gave birth to Indian Airlines and Air
India. Indian Airlines was formed with the merger of eight domestic
airlines to operate domestic services, while Air India International was
to operate the overseas services.

The next phase came with granting of permission to private sector
players to operate as air taxi operators. However, only two private
carriers survived to see the dawn of the new century. In 2003 Jet and
Sahara was challenged by Air Deccan. Air Deccan gave India its first
Low Cost Carrier (LCC) or no frills Airline. Arrival of Deccan brought a
revolution in this sector; it changed the common man’s perception of
flying by matching airline fares neck to neck with upper class railway
fares. Spurred by the success of Air Deccan other airlines entered the
sector and opted for No Frill model. Since then a number of domestic
airline groups have emerged in a reasonably short span of time to
making the market furiously competitive. Spice jet, Kingfisher, Indigo,
Go Air and many others have begun operations in India. Earlier air
travel was a privilege only a few could afford, but today air travel has
become much cheaper and can be afforded by a large number of

Indian Aviation saw yet another milestone in the year 2007 which
became the year of marriages in Indian skies; the formation of NACIL
(merger of Air India and Indian Airlines), acquisition of Air Sahara by
Jet Airways and merger of Kingfisher Airlines and Air Deccan.

Karan Shetty                                                         Page 2
Mergers often result in fleet-trimming and the elimination of redundant
services across certain markets. That’s potentially bad news for
airline employees, but good news for fliers. Fliers fear that increased
consolidation will mean higher ticket prices and the monopolization of
certain markets. The general perception is that competition is healthy
for all the market as it guarantees maximum benefits being trickled to
the consumer groups.


Civil Aviation plays an integral role in development of an economy. In
the recent years it has seen a tremendous growth which is driven by
government aided reforms & market dynamics, increase in
consumerism, rising disposable income; booming aviation sector;
burgeoning middle class; increasing business travel, entry of low cost
carriers; increasing competition etc. In order to maintain this growth, it
is very important that competitive forces must continue to operate
with in this sector. Certain characteristics in this sector are anti-
competitive in nature. For example Loyalty programs which include
frequent flier programs, travel agent incentive schemes; these
distinguish leisure travelers from business travelers.

In the aviation sector capacity cannot be augmented as per the rising
demand. Airports have capacity constraints in terms of the landing,
take off facilities, air traffic controllers, refueling, and maintenance,
clearing &catering services etc. which in turn curb the entry of new
entrants. Landing and take-off rights (slots) are also an important
consideration for an entrant as peak timed slots register higher
passenger load factors as compared to the oddly timed slots. Some
regulatory barriers inherent in our domestic air transport policy may
also constrain new entries and have and anti-competitive effect. The
current regulations seem to favour only the incumbents namely Air
India-Indian Airlines and Jet-Sahara. The year 2007 has been the
year of mergers in Indian aviation. First it was Indian Airlines and Air
India, followed by Jet and Sahara and the Kingfisher and Deccan
merger. Industry sources believed it to bring in route, network and

Karan Shetty                                                        Page 3
fleet rationalization. On the other hand consumers feared rise in
prices especially after the Deccan merger.

This report is divided into various sections. The first four sections
include an introduction to the sector, the summary, types of services
and competitors in the sector. Followed by the next section which
highlights importance of competition, general competition issues in
the airline industry and competition issues faced by the Indian
aviation Industry. And finally incorporating the conclusion.


Indian Aviation Sector has witnessed tremendous growth in the
recent past which is driven by Political; Economic Socio-Cultural;
technological factors. The drivers to growth are:
Government Reform Measures
Rising Middle Class Population
Rising Disposable incomes 
 Untapped Market
Increasing Business Travel
Increasing Tourists Travel
Increase in Consumerism
Entry of Low Cost Carriers
 Increasing Competition
The mix of the above mentioned fundamentally strong favorable
dynamics has positioned India’s Aviation industry in a high growth

Karan Shetty                                                   Page 4
trajectory in the foreseeable future. Worldwide, air traffic has a strong
correlation with economic growth and in emerging markets like India;
a rise of 1% in GDP is expected to result in a 2% increase in air
traffic. Disposable income in India has gone up in the last 2 decades
and the expenditure on transportation has also risen. The increase in
trade activity within the nation, the emerging middle class along with
upper middle population have created huge demand for air-travel


The Indian airline sector can be broadly dived into the following main

   1. Scheduled Air transport service (Includes domestic and
      international airlines): It is an air transport service undertaken
      between two or more places and operated according to a
      published timetable. It includes:

          Domestic airlines, which provide scheduled flights within
           India and to select international destinations.

          International      airlines,   which   operate   scheduled
            international air services to and from India.
   2. Non-scheduled air transport service (Includes charter
      operators and air taxi operators): It is an air transport service
      other than the scheduled one and may be on charter basis
      and/or non-scheduled basis. The operator is not permitted to
      publish time schedule and issue tickets to passengers.

   3. Air cargo services (Includes air transportation of cargo and
      mail): It is an air transportation of cargo and mail. It may be on
      scheduled or non scheduled basis. These operations are to
      destinations within India. For operations outside Indi, the
      operator has to take specific permission of Directorate General
      of Civil Aviation demonstrating his capacity for conducting such
      an operation.

Karan Shetty                                                       Page 5

Indian skies are housing a decent number of airlines today compared
to the scenario prior to 1990s. They include:

I. Air India

  The history of Air India is the History of Indian Aviation. It is one of
  the oldest and the largest airline of India. Air-India was founded by
  J.R.D. Tata in July 1912 as Tata Airlines. Founded as a small,
  private, domestic carrier in 1932, Air-India is now owned by
  government. It operates only on International routes and has
  negligible presence in the domestic traffic.

II. Indian Airlines

   Indian and Air India were born with nationalization of Air Transport
  in 1953 by way of Air Corporation Act, 1953. Indian Airlines
  emerged as a merger of 8 domestic carriers. It caters mainly to
  domestic routes and in some nearest nations.
  The two national carriers have enjoyed sole monopoly in the air
  transport segment over a long period of time as private carriers
  were debarred from entering the segment under the Air
  Corporation Act, 1953. The private players like Jet, Sahara and
  others were made to enter the segment only after the New
  Economic Policy, 1991 came into existence. Another major turning
  point has come in the history of the Air Industry when Air India was
  granted permission from the GOI (Government of India) to merge
  with Indian Airlines, the two national carriers of India. This Mega
  Merger marked the first marriage in the Indian skies which was
  followed by other mergers. The name of the new airline remained
  Air India, since it is known worldwide.

Karan Shetty                                                        Page 6
III.     Jet Airways

   In May 1974 Jetair (Private) Limited was founded. In 1991, as part
   of the ongoing diversification program of his business activities,
   Naresh Goyal (founder of Jet Airways) took advantage of the
   opening of the Indian economy and the enunciation of the Open
   Skies Policy by the GOI, to set up the company for the operation of
   scheduled air services on domestic sectors in India. It started its
   International Operations in the year 2004 and carries more than 7
   million passengers per annum. In May 2007, Jet Airways took
   100% stake in Air Sahara. JetKonnect was launched in May 2009
   as competition increased in the no-frills category. Jetlite contributes
   nearly three-quarters of the group's domestic revenue, with the rest
   coming from JetKonnect.. Effective March 25th 2012, JetLite will
   cease to operate separately, but will come under the JetKonnect
IV. Kingfisher

        Kingfisher airlines initiated its operations in May, 2005. It is a
       major Indian luxury airline operating an extensive network through
       domestic and international services. In 2007, Kingfisher Airlines,
       through one of its holding company UB holdings Ltd acquired 26%
       stake in the budget airline Air Deccan and renamed it Kingfisher

V. GoAir

   GoAir is an Indian low-cost airline based in Mumbai. It was
   established in June 2004, the airline started its operations in
   October 2005 with a fleet of 20 leased Airbus A320 aircraft.

VI. Indigo

   IndiGo Airlines commenced its operations in 2006 and went on to
   swiftly establish itself as one of the premier budget airlines in the
   country. IndiGo Airways soon added IndiGo flights and destinations
   to its network. The unimpeachable services and timely

Karan Shetty                                                        Page 7
  performances of IndiGo flights added to the popularity of the airline.
  Indigo has climbed to second place in market share and is the only
  one of India’s six main carriers making a profit, for now at least.

VII. Spicejet

  SpiceJet, a rebirth of ModiLuft marked its entry in service by
  offering fares priced at Rs.99 for the first 99 days since its inception
  in 2005. The carrier is giving tough competition to Railways. Today,
  it is India`s most preferred budget airline.


Indigo and Kingfisher remained the top performers in the Industry on
back of good and timely services. Kingfisher currently held 19.5%
percent Indian market share closely followed by Indigo Airlines which
has 19.2% market share. Although, the Jet Airways and Jet Lite
combined market share is higher at 24.8 percent. Air India, Spice Jet
and Go Air account for the remaining balance

Karan Shetty                                                        Page 8

 Competition in the market means sellers striving independently for
buyer’s patronage to maximize profit or other business objectives. A
seller prefers to sell the product at a price that maximizes his profit
whereas a buyer prefers to buy a product at a price that maximizes
his benefits. Competition makes an enterprise more efficient and
offers a wider choice to consumers at a lower price. Fair competition
is beneficial for the Consumers, Producers / Sellers and finally for the
whole society as it induces economic growth. In order to realize this
objective to competition in the economy the Competition Commission
of India (CCI), passed the Competition Act, 2002, keeping in view the
economic development of the country.

The objective of the Competition Act is to prevent practices having
adverse effect on competition, to promote and sustain competition in
markets, to protect the interests of consumers and to ensure freedom
of trade carried on by other participants in markets in India.

Air transport services face a marginal degree of competition from
other modes of
transportation. Potential substitutes for air travel depend upon the
purpose of travel. Railways are a near substitute for air but only valid
for short to medium distance journeys. But for longer journeys, there
isn’t a substitute available to match air services. The nature demand
for air services is different across different class of travelers.

 With the mergers in the aviation sector among the airlines,
consumers feared fares would increase post consolidation. The
mergers are expected to help the
industry tide over losses which would be ensured via network
optimization; operational rationalization and fleet rationalization.
However, equally justified are the fears of the consumer groups
anticipating price rise post mergers.

Karan Shetty                                                      Page 9
Certain features of the Airline industry favor anti-competitive

    LOYALTY PROGRAMS: Airlines use Loyalty Programs to
     discriminate between the time sensitive businessmen and the
     ones traveling for leisure purposes. These include Travel agent
     incentive schemes and Frequent flier programs. By these
     airlines attempt to raise the cost of switching between airline

    MULTI-CONTACT: The number of markets in which firms meet
     is a factor influencing the likelihood of oligopolistic coordination.
     When each firm has one or more “home” markets in which it is
     dominant, it is less likely to challenge the dominant position of a
     rival firm in the rival’s “home” market, for fear of facing
     competition in its home market. Conversely, the biggest threat
     to such comfortable arrangements is likely to come from rival
     firms with no domestic dominant position.

     provision of air services requires the inputs of a host of other
     Complementary airport services, including take-off and landing
     slots, air-traffic control services, gates, passenger handling
     facilities, baggage handling facilities, refueling, maintenance,
     cleaning and catering services etc. Infrastructural scarcity can
     both reduce competition in markets and can potentially distort
     competition in air transport services.

     industry features a very high degree of transparency over
     prices and volumes. Such transparency can be an instrument
     for collusion as it facilitates the detection of cheating on a cartel
     agreement. This transparency acts as a boon and as a bane
     too. While transparency in the pricing pattern is important to
     Consumer so as to make choices keeping in mind the cost,
     schedule and time taken to complete the journey. At the same
     time, chances of cartelization can’t be ruled out either.

Karan Shetty                                                       Page 10
     airline alliance is an agreement between two or more airlines
     to cooperate for the foreseeable future on a substantial level.
     Since it is virtually impossible for a single carrier to serve all the
     places across the world, carriers tie up with carriers of other
     countries entering into alliances and various co-operative
     arrangements such as code sharing, blocked space, co-
     operation in frequent flyer programs, joint marketing, service
     and purchasing, and franchising etc. The main objective of an
     alliance is to strengthen or expand the aligning member’s
     market presence and to redefine or consolidate their position in
     the increasingly competitive global environment. Airline
     alliances benefits to the consumer by offering seamless travel
     and services between a more extensive range of city pairs,
     reduction in traveling time, joint lounges and co-ordination of
     Frequent flier programs. An alliance can significantly reduce
     competition on overlapping non-stop routes and overlapping
     connecting routes where the allied airlines were once main

Karan Shetty                                                        Page 11

The Indian aviation sector has its own competition related issues. The
Competition Act, 2002 prohibits associations which cause or are likely
to cause an appreciable adverse effect on competition within India.

    SCARCITY OF SLOTS: Airports have a fixed capacity and in
     terms of their ability to handle traffic. Therefore, even though
     there is an increased demand, capacity cannot be augmented
     in response to demand. Major metropolitan airports are
     becoming congested and are constrained in terms of capacity.
     This can act as a barrier for new entrants as allocation of slots
     is based on first come first serve basis. Allocation of slots is an
     issue as it can decide the profitability of the new entrant to
     some extent. Existent carriers are able to get rid of competition
     by occupying prime slots at capacity restrained airports.

      Carriers target the business class more than the leisure class
      as their      responsiveness to price change is negligible. The
      incumbents have strategically timed their flights to fit the
      business class schedules which deprive the late entrants to
      access the peak slots. Thus, fair allocation of slots is an
      important issue that needs to be addressed

    REGULATORY BARRIERS: The possibility of a new entry of a
     new entry is curtailed owing to regulatory barriers an capacity
     constraints. Although the domestic air travel policy is liberal
     there are a few stipulations.

    Private sector is allowed to operate scheduled and non-
     scheduled services.
    Scheduled operators r required to follow route dispersal
     guidelines which are aimed at extending air traffic services to
     routes which are not commercially viable.
    Operators are required to have a stipulated level of fleet size
     and subscribed equity capital.

Karan Shetty                                                     Page 12
    Foreign financial institutions and other entities who seek to hold
     equity in the domestic air transport sector shall not have foreign
     airlines as their share holders. Foreign airlines are not
     permitted to pick up equity.
    Foreign equity participation up to 49 per cent and investment by
     Non-Indian Residents (NRIs), Overseas Corporate Bodies
     (OCBs) up to 100% is allowed. The representation of the
     foreign investing institution/entity on the Board of Directors of
     the company shall not exceed one-third of the total.
    Open skies policy for cargo services.
    As regards safety and security arrangements, the operators
     must ensure compliance with relevant regulatory requirements
     stipulated respectively by the Director General of Civil Aviation
     (DGCA) and the Bureau of Civil Aviation Security (BCAS).
    A domestic carrier must have flown for at least 5 years before
     entering the International Skies.

     Competition Act 2002, The Competition Commission of India
     (CCI) has set bench marks for all mergers and acquisitions. All
     three recent mergers, IA-AI, Jet-Sahara, and Kingfisher –
     Deccan qualify for the competitive scrutiny of CCI against anti-
     competitive effects.

          IA-AI MERGER: IA being a domestic carries and AI
           taking to the international skies their merger will not have
           an impact from the competition angle. However AI
           maintains the exclusive right to the gulf while IA derives
           its benefits from the Peak slots.

          JET-SAHARA MERGER: Both began their operations at
           the same time and were the only two carriers who
           survived the 90s.They also have overlapping networks
           and had access to the prime slots .This take over has
           given Jet a dominant position. Also, prior to the merger
           Jet and Sahara were competing on international routes.
           Post consolidation the competition in the international
           skies also reduced.

Karan Shetty                                                    Page 13
          KINGFISHER-DECCAN MERGER: Both these catered to
           a different class of passengers before the merger.
           Kingfisher was a full service carrier while Deccan being a
           LCC model catered to leisure travelers. However both the
           carriers have overlapping networks. As Deccan’s entry
           introduced cheap fares, consumer groups feared the price
           hike due to this consolidation.
           Post Merger these three account for about 60% of market

    CARTELISATION: As the Competition Act, 2002 any
     agreement which causes or is likely to cause, appreciable
     adverse effects on competition in markets in India is prohibited.
     Any such agreements will be void.

        If there is effective competition in the markets, cartels would
find it difficult   to be formed & sustained.

      Any agreement entered into between associations shall be
      presumed anti-competitive if:

    They directly or indirectly determine purchase or sale prices.
    They limit or control production, supply, markets, technical
     development, investment or provision of services.
    They share the market or source of production or provision of
     services by way of allocation of geographical area of market, or
     type of goods or services, or number of customers in the
     market or any other similar way.
    They directly or indirectly results in bid rigging or collusive
     "Bid rigging" means any agreement, between enterprises which
     has the effect of eliminating or reducing competition for bids or
     adversely affecting or manipulating the process for bidding.

Karan Shetty                                                    Page 14

The Indian aviation sector has witnessed tremendous growth in the
recent years with key drivers being positive economic factors, good
industrial performance, higher disposable incomes, growth in
consumer spending, and availability of low fares. Post the arrival of
LCC’s The growth has been remarkable. It is very important that
competitive forces continue to operate if the growth trajectory is to be

There are some plaques in the industry that are anti-competitive;
such as frequent flier programs by which airlines distinguish between
leisure travelers and the business class, and other loyalty programs.

Slot constraints and infrastructural limitations restrict new entrants.
Price transparency has its advantages and disadvantages as well. It
can enhance chances of collusion while allowing consumers to make
their choices.
Regulatory barriers on our domestic air transport policy have a few
anti-competitive effects. Exclusive rights for national carriers to fly gulf
routes etc constrain new entrants.

2007 was the year of Merger in the Indian skies. IA merger with AI,
Jet took over Sahara and Kingfisher with Deccan. The consolidation
is believed to have brought some rationalization in routes &help
carriers focus on other routes. On the other hand consumers feared
prices hikes, more in the case of the Kingfisher-Deccan alliance as
Deccan Initiated the low fare war.

All three mergers met the standards laid down by the Competition act
2002. The IA-AI merger doesn’t pose much of an issue as IA and AI
both have complementary networks. However, the monopoly on the
gulf routes are unfair and depriving other players from an important
source of revenue.

With the Jet-Sahara deal, Air Sahara’s rights were automatically
accrued to jet, putting jet in a dominant position, thereby restraining
growth of competition.

Karan Shetty                                                         Page 15
The Kingfisher-Deccan deal plagued a lot of hue as customers
expected the fares to rise in future. They both have overlapping
networks but cater to different set of consumers. The rise in current
fares will be justified as long as they reflect the true cost of ATF Fuel
& other operating expenses.
With the top three players Acquiring over 60%of the market share
chances of cartelization are enhanced, post consolidation. Hence,
CCI must keep a check on such anti- competitive practices.


    Google

      Aviation Industry in India, Challenges by Low Cost Carriers by
       Shashi Sharma

    The Competition Act, 2002.

    Indian Aviation Statistics :

    Link:

Karan Shetty                                                      Page 16

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