Competition in the Aviation Sector

Submitted to:

Ms.Prathyusha Samdevam

Assistant Faculty

Faculty of Law

Submitted by:

Permanika Chuckal (201275)

Vishwaja Rao (201285)

Damodaram Sanjivayya National Law University

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Table of Contents
Serial Topic Page No.
No.
1. Introduction 3
2. FDI Policies and Implementation in India 8
3. Arguments on behalf of the Ruling 14
4. Arguments on behalf of the Opposition 15
5. General Observations 16
6. Conclusion 23
7. Bibliography 23

INTRODUCTION

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Indias civil aviation industry is on a high-growth trajectory. India aims to become the third-
largest aviation market by 2020 and the largest by 2030.

The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as
low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic
airlines, advanced information technology (IT) interventions and growing emphasis on
regional connectivity. India is the ninth-largest civil aviation market in the world, with a
market size of around US$ 16 billion. India is expected to become the third largest aviation
market by 2020.

The world is focused on Indian aviation from manufacturers, tourism boards, airlines and
global businesses to individual travellers, shippers and businessmen. If we can find common
purpose among all stakeholders in Indian aviation, a bright future is at hand said Mr. Tony
Tyler, Director General and CEO, International Air Transport Association (IATA).1

Market Size

During January-August 2016, domestic air passenger traffic rose 23.14 percent to 64.47
million from 52.36 million during the same period in 2015. Passenger traffic during FY 2015-
16 increased at a rate of 21.3 per cent to 85.57 million from 70.54 million in the FY 2014-15.

In July 2016, total aircraft movements at all Indian airports stood at 168,400, which was 14.3
per cent higher than July 2015. International aircraft movements increased by 8.2 per cent to
32,830 in July 2016 from 30,330 in July 2015. Domestic aircraft movements increased by
15.8 per cent to 135,570 in July 2016 from 117,050 in July 2015.

Indian domestic air traffic is expected to cross 100 million passengers by FY2017, compared
to 81 million passengers in 2015, as per Centre for Asia Pacific Aviation (CAPA).

India is among the five fastest-growing aviation markets globally with 275 million new
passengers. The airlines operating in India are projected to record a collective operating profit
of Rs 8,100 crore (US$ 1.29 billion) in fiscal year 2016, according to Crisil Ltd.

1 http://www.ibef.org/industry/indian-aviation.aspx, last accessed on 17th October 2016

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Investment

According to data released by the Department of Industrial Policy and Promotion (DIPP),
FDI inflows in air transport (including air freight) between April 2000 and March 2016 stood
at US$ 931.05 million.

Key investments and developments in Indias aviation industry include:2

Airbus SAS has signed an agreement with Karnataka-based Aequs Aerospace, an

aircraft component maker, for the supply of over 100,000 titanium machined parts for
its A320 new engine option (NEO) aircraft.

Boeing Company, an American plane maker, and Tata Advanced Systems Ltd (TASL),
a fully owned subsidiary of Tata Sons, have entered into a joint venture to set up a
new facility in Hyderabad to manufacture Boeing AH-64 Apache helicopter fuselages.

GoAir, India's fifth-biggest carrier by passengers travelled, has signed a memorandum

of understanding (MoU) with Airbus to buy 72 A320neo aircrafts, valued at US$ 7.7
billion, as part of an expansion drive.

Lockheed Martin Corporation plans to make India a manufacturing base for its F-16V
fighter jets, C-130J Super Hercules military transport planes and helicopters.

Auto components maker Bharat Forge Ltd (BFL), the flagship company of the US$ 3
billion Kalyani Group, has formalised agreement with Rolls-Royce Plc, under which
BFL will supply critical and high integrity forged and machined components for a
range of aero engines.

The Ministry of Civil Aviation has signed Memorandum of Understanding (MoU)

with Finland, Kazakhstan, Kenya, Sweden, Norway, Denmark, Oman and Ethiopia for
increased co-operation between the countries in terms of additional seats, sharing of
airlines codes, increased frequencies and additional points of call, during the
International Civil Aviation Negotiations (ICAN),2015 held in Antalya, Turkey.

2 Ministry of Civil Aviation (Government of India), National Civil Aviation

Policy 2016 (15 June 2016) p.1, last accessed on 19 October 2016.
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 Tata Advanced Systems (TASL) has signed a joint venture with American aircraft
manufacturing major, Boeing, to establish a centre of excellence for manufacturing
aero structures for Apache helicopter initially and collaborate on integrated systems
development opportunities in India in the long term.

US-based aircraft manufacturer Boeing plans to assemble one of its two helicopters
namely, Chinook (heavy-lift) or Apache (attack type) in India, thus becoming yet
another global company to invest in India encouraged by the Make in India
campaign.

Airbus, leading European aircraft manufacturer, plans to invest US$ 40 million to set
up a pilot and maintenance training center in New Delhi, which will be operational by
the end of 2017.

Airbus also expects Indias aviation industry to grow at over 10 per cent annually in
the next decade, almost double the average growth rate of the global aviation industry.

Government Initiatives

Government agencies project that around 500 brownfield and greenfield airports would be
required by 2020. The private sector is being encouraged to become actively involved in the
construction of airports through different Public Private Partnership models, with substantial
state support in terms of financing, concessional land allotment, tax holidays and other
incentives.

In the Union Budget 2016-17, the government introduced various proposals for Maintenance,
Repair and Overhaul (MRO) operations for airplanes. These include customs and excise duty
exemption for tools and tool-kits used in MRO works. The government has also scrapped the
one-year restriction for utilisation of duty free parts apart from allowing import of
unserviceable parts by MROs for providing exchange. As per revised norms, the foreign
aircraft brought in to India for MRO work would now be permitted to stay up to six months
or as extended by aviation regulator Directorate General of Civil Aviation (DGCA). Such
foreign aircraft would also be henceforth permitted to carry passengers in the flights at the
start and end of its period of stay in India.

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Some major initiatives undertaken by the government are:3

The Ministry of Civil Aviation has finalised and put forward for approval to the Union
Cabinet, the new aviation policy, which includes proposals such as allowing new
airlines to fly abroad, introduction of more regional flights and a new formula for
granting bilateral flying rights.

The Indian Space Research Organisation (ISRO) has signed a memorandum of

understanding (MOU) with the Airports Authority of India (AAI), aimed at providing
space technology for construction of airports.

The Government of India is planning to boost regional connectivity by setting up 50

new airports over the next three years, out of which at least 10 would be operational
by 2017.

Airports Authority of India (AAI) plans to develop city-side infrastructure at 13

regional airports across India, with help from private players for building of hotels,
carparks and other facilities, and thereby boost its non-aeronautical revenues.

Directorate General of Civil Aviation (DGCA), India's aviation regulator, has signed
an agreement with United States Technical Development Agency (USTDA) for India
Aviation Safety Technical Assistance Phase II, aimed at bringing in systemic
improvements in the area of operation, airworthiness and licensing.

The Government of India has given site clearance to Delhi Mumbai Industrial
Corridor and Development Corporation (DMICDC) for setting up of a Greenfield
Airport for public use near Bhiwadi in Alwar district of Rajasthan and has granted 'in-
principle' approval to 13 other greenfield airport projects.

The Airports Authority of India (AAI) plans to revive and operationalise around 50
airports in India over the next 10 years to improve regional and remote air
connectivity.

3 http://www.icao.int/Meetings/atconf6/Documents/WorkingPapers, last
accessed on 20th October 2016
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 Gujarat is expected to get a second international airport at Dholera. The state
government has formed Dholera International Airport Co. Ltd. and is obtaining
approvals from the union government.

The Directorate General of Civil Aviation (DGCA) has given its approval to Air
Indias maintenance, repair and overhaul (MRO) unit.

The Government of India has decided to award airports in Kolkata, Chennai, Jaipur
and Ahmedabad on management contract. AAI has issued the Request for
Qualification document for these four airports.

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FOREIGN DIRECT INVESTMENT IN THE AVIATION SECTOR

100% Foreign Direct Investment (FDI) is permitted for Greenfield airport projects
under the automatic route.

Up to 74% FDI is permitted for existing airport projects under the automatic route,
above 74% and up to 100% permitted under government approval route.

Up to 49% FDI is permitted in domestic scheduled passenger airlines under the

automatic route. 100% permitted for NRIs. Up to 49% FDI under the automatic route
is permitted in Non-Scheduled Air Transport Service. FDI above 49% and up to 74%
is permitted under Government approval route. 100% FDI permitted for NRIs.

Up to 100% FDI is permitted in helicopter services and seaplanes under the automatic
route.

Up to 49% FDI is permitted in ground handling services under the automatic route.
FDI above 49% and up to 74% is permitted under government approval route. 100%
FDI permitted for NRIs.

Up to 100% FDI is permitted in maintenance and repair organisations; flying training

institutes; and technical training institutes under the automatic route.

Investments are subject to relevant regulations, approvals from DGCA and security
and other conditions. Foreign airlines are also, henceforth, allowed to invest in the
capital of Indian companies, operating scheduled and non-scheduled Air Transport
Services, up to the limit of 49% of their paid-up capital. Investments will be subject to
government route.4

NATIONAL AVIATION POLICY 2016

The policy is very comprehensive, covering 22 areas of the Civil Aviation sector. Its
salient features are as follows :

4http://www.makeinindia.com/sector/aviation,last accessed on 21st October 2016

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 Regional Connectivity Scheme 5
This scheme will come into effect in the second quarter of 2016-17

Airfare of about Rs2500 per passenger for a one-hour flight

This will be implemented by way of:

Revival of airstrips/airports as No-Frills Airports at an indicative cost of Rs.50 crore
to Rs100 crore.

Demand driven selection of Airports/airstrips for revival in consultation with State

Govts and airlines.

ViabilityGapFunding(VGF)toairlineoperators.

RCS only in those states which reduce VAT on ATF to 1% or less, provide other
support services and 20% of VGF.

Concessions by Stakeholders.

There will be no airport charges.

Reduced Service tax on tickets (on 10% of the taxable value) for 1 year initially.

Reduced Excise duty at 2% on ATF picked at RCS airports.

State government will provide police and fire services free of cost. Power, water and
other utilities at concessional rates.

Creation of Regional Connectivity fund for VGF through a small levy per departure
on all domestic flights other than Cat II/ Cat IIA routes, RCS routes and small aircraft
below 80 seats at a rate as decided bythe Ministry from time to time

VGF to be shared between MoCA and State Governments in the ratio of 80:20. For
the North Eastern States, the ratio is 90:10.

5 Ministry of Civil Aviation (Government of India), National Civil Aviation

Policy 2016 (15 June 2016) p.3, accessed 20th October 2016.
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 Route Dispersal Guidelines (RDG) 6
Category I to be rationalized based on a transparent criteria, i.e., flying distance of
more than 700km, average seat factor of 70% and above and annual traffic of 5 lakh
passengers

The percentage of Cat.I traffic to be deployed on Cat.II, and IIA will remain the same
while for CATIII it will be 35%. Routes to Uttarakhand and Himachal Pradesh
included in Category II

Revised categorization to apply from winter schedule of 2017

There view of routes will be done by MOCA once every5 years

Withdrawal or revision of domestic operations to and within North East Region etc,
subject to full compliance of RDG, can be done under prior intimation to MOCA at
least three months before withdrawal or revision of the service

Requirement/720 Requment
Replaced with a scheme which provides a level playing field

All airlines can now commence international operations provided that they deploy 20
aircraft or 20% of total capacity (in term of average number of seats on all departures
put together), whichever is higher for domestic operations.

Bilateral Traffic Rights

GOI will enter into Open Sky ASA on a reciprocal basis with SAARC countries
and countries located beyond 5000 km from Delhi

For countries within 5000 km radius, where the Indian carriers have not utilised
80% of their capacity entitlements but foreign carriers /countries have utilised their

6http://pib.nic.in/newsite/PrintRelease.aspx?relid=146238 , last accessed on 20th October 2016

7 Arindam Majumder, Cabinet clears civil aviation policy, replaces 5/20

condition with 0/20 rule Business Standard (New Delhi 15 June 2016)
accessed on 19 October 2016
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 bilateral rights, a method will be recommended by a Committee headed
by Cabinet Secretary for the allotment of additional capacity entitlements

Whenever designated carriers of India have utilised 80% their capacity

entitlements, the same will be renegotiated in the usual manner.

Ground Handling Policy

The Ground Handling Policy/Instructions/Regulations will be replaced by a new
framework:

The airport operator will ensure that there will be three Ground Handling
Agencies (GHA) including Air Indias subsidiary/JV at all major airports as
defined in AERA Act.

At non-major airports, the airport operator to decide on the number of ground

handling agencies, based on the trafficoutput, airside and terminal building capacity

All domestic scheduled airline operators including helicopter operators will be free
to carry out self-handling at all airportsthrough their regular employees Hiring of
employees through manpower supplier or contractworkers will not be permitted for
security reasons

Airport PPP/AAI
Encourage development of airports by AAI, State Governments, the private sector
or in PPP mode

Future tariffs at all airports will be calculated on a 'hybrid till' basis, unless specified
otherwise in concession agreements. 30% of non-aeronautical revenue will be used
to cross- subsidise aeronautical charges

Increase non-aeronautical revenue by better utilisation of commercial opportunities of

city side land

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 AAI to be compensated in case a new greenfield airport is approved in future within
a 150 km radius of an existing unsaturated operational AAI airport (not applicable
to civil enclaves)

Aviation Security, Immigration and customsA

sMoCA will develop service delivery modules for aviation security, Immigration, Customs,
quarantine officers etc in consultations with respective Ministries/Departments

Allow Indian carriers to provide security services to other domestic airlines subject to
approval of BCAS.

Encourage use of private security agencies at airports for non- core security functions
to be decided in consultation with MHA.

Such agencies should be registered under the Private Security Agencies

(Regulation) Act, 2005 and will also be separately accredited by BCAS.

Subject to minimum benchmarks being met, security architecture at the different

airports will be proportionate to the threat classification and traffic volume.

Helicopters and Charters I

Separate regulations for helicopters will be notified by DGafter due stakeholder
consultation.

MoCA to coordinate with Govt agencies and other helicopter operators to facilitate
Helicopter Emergency Medical Services.

Helicopters will be free to fly from point to point without prior ATC clearance in
airspace below 5000 feet and areas other than controlled or prohibited or restricted
airspace.

Airport charges for helicopter operations will be suitably rationalized.

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 The existing policy of allowing Inclusive tour package charters will be further
reviewed to include more categories of passenger charter flights recognised globally.

Maintenance, Repair and Overhaul8

The MRO business of Indian carriers is around Rs 5000 crore, 90% of which is currently
spent outside India. In the budget for 2016-17, customs duty has been rationalised and the
procedure for clearance of goods simplified. Further incentives proposed in the policy to give a
push to this sector:

MoCA will persuade State Governments to make VAT zero- rated on MRO
activities.

Provision for adequate land for MRO service providers will be made in all future
airport/heliport projects where potential forsuch MRO services exists.

Airport royalty and additional charges will not be levied on MRO service
providers for a period of five years from the date ofapproval of the policy

Aviation Education and Skill Building

Estimated direct additional employment requirement of the Civil Aviation Sector by 2025 is
about 3.3 lakh. All training in non licensed category will conform to National Skill
Qualification Framework standards. MoCA will provide full support to the Aviation Sector
Skill Council and other similar organisations/agencies for imparting skills for the growing
aviation industry. There are nearly 8000 pilots holding CPL but who have not found any
regular employment. MoCA will develop a scheme with budgetary support for Type-
rating of Pilots. The detailed scheme will be worked out separately.

8 http;//www.thb.gov.hk/eng/boards/aviation/edu/summary,last accessed
on 21st October 2016
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ADVANTAGES AND DISADVANTAGES OF FDI IN AVIATION SECTOR9

In the aviation industry, there is this famous quote- If you want to make millions in the airline
business, then start with billions. The quote holds true not only for developing nations, but
also across the globe. Despite the soaring demand due to an inclusive rise in per capita income
of the world population, the airline business is still far from being the most lucrative one. No
matter how developed the United States of America is, all its international airliners are
bankrupt and are flying due to the governments grace. The situation is similar in a majority of
the other nations too, but there are also success stories, such as China Airlines, Singapore
Airlines, Virgin Atlantic, and a couple of Gulf carriers, to name a few. Interestingly,
domestically-focused no-frill airlines such as Southwest and Jet Blue in the USA, IndiGo
Airlines in India and Ryan Air of UK are in better positions than their larger international
competitors.

India is the worlds 9th largest civil aviation market in the world, and the 4th largest in
domestic passenger volumes with over 45 million fliers annually. There are 5 major scheduled
passenger airlines in India, namely, Jet Airways and its subsidiaries, IndiGo, Air India, Spice
Jet and Go Air. IndiGo leads the pack with a 30% market share and it is the online airline with
a green bottom-line with a positive figure of over USD 130 million. Kingfisher Airlines, which
once dominated the market share, is now out of the business for almost a year with no sign of
a revival. As per ICRA, the Indian aviation sector shrunk by 3.2% in the FY 201213, and has
had a Compounded Annual Growth Rate (CAGR) of 9.2% for the past 5 years. This poor
show is largely because of the sudden exit of Kingfisher Airlines, which led to the
underutilization of resources in the sector, coupled with non-cateredroutes that once used to be
the primary sectors for Kingfisher Airlines. On a positive front, ICRA has stated that the
industry might come back to 11% CAGR due to the expansion of Low Cost Carriers (LCC)
and cost rationalization by the existing carriers.

The enhancement of the FDI limit in the aviation sector permits FDI up to 49% and
investment by Non-Resident Indians (NRI) up to 100% on the automatic route, subject to
regulations notified by Ministry of Civil Aviation. Like a coin, the move comes with two sides
with its own set of Pros and Cons.

9 https://medium.com/@TIE/fdi-in-aviation-sector-a-bon-voyage-or-just-a-mirage-
75b4013c0980#.9rc6cpxns , last accessed on 21st October 2016

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Arguments on behalf of the Ruling:

Tackling the ever growing Debt: Indian airlines are flying with an accumulated debt
of close to INR 20,000 crores that is probably more than the market capitalization of a
majority of Indian companies. With a debt of this size, the airline business in India
does not look healthy. With the introduction of FDI, airlines can well get away with a
good chunk of this debt and probably raise fresh capital for expansion or revival
purposes.

Improvement in Infrastructure: Foreign investors while going for FDI in the

aviation sector will not sit back infusing capital in the airlines. They will definitely
look forward to safeguarding their investments by ensuring that there is an efficient
technology transfer alongside the capital. This will help the Indian carriers to offload
some of their unproductive modes of operations and get introduced to international
methods of saving costs and thus gaining customer loyalty.

Synergies: As the Indian carriers will get a chance to breathe fresh air with FDI, they
will also have access to the infrastructure and customer base of the capital infusing
company. For example, if an airline from UK invests in an Indian carrier, definitely to
improve the state of the airline, the UK carrier will not only give access to the Indian
carrier to its international hubs, but it will also look forward to bringing in synergy
amongst its customer loyalty programs with that of the Indian carrier. Similarly, the
international carrier will look forward to managing the utilization of resources by
enabling the Indian carrier to offload the unproductive resources while making use of
the ones owned and managed by its international counterpart.

Economic Development: When our import bill is inflating and we have an increasing
fiscal deficit apart from a ballooning Current Account Deficit, any kind of FDI will
anyway help the economy positively. Also, the domestic banks that are hiding and
wallowing in their misery for the loans that they have granted to the Indian carriers,
which are now under the umbrella of Non-Performing Assets, will get a push in terms
of both repayment of loan by these carriers post capital infusions, as well as market
capitalization due to the positivity amongst their shareholders.

Arguments on behalf of the Opposition

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 Predatory Pricing: Many analysts believe that as a result of the support given by the
profitable international airlines to the domestic ones, airfare might be undercut, which
will harm the hopes of other domestic carriers. This will further lead to an increased
competition amongst LCCs, motivating price wars that will negatively impact the
bottom lines of non-FDI backed airlines.

Infrastructural and Political Issues: On paper the regulations say that up to 49% FDI
will be allowed through the automatic route, but in reality, each proposal will be
scrutinized by the apex aviation regulatory body of India apart from the standard
evaluation done by authorities like the Department of Industrial Policy and Promotion,
Foreign Investment Promotion Board and Cabinet Committee on Economic Affairs
that will anyway lengthen the procedure of actual realizable investment. Another issue
is that even if we get larger domestic airlines in the near future, the infrastructure
(except metros and sub-metros)does not have not too much to talk about. So instead of
promoting direct FDI in airlines, there is a dire need of promotion of FDI in
infrastructure.

Domination of the investors: FDI can also lead to foreign investors forcing the Indian
carrier they might invest in to fly by their terms, if not officially, then unofficially.
They will definitely command the Indian carriers to implement the principles as per
their requirements as the investors will always be aiming towards turning the airline
into a profitable one, at leastuntil they can gain from the share they have bought in the
airline.

The Mayaram Committee has recommended a 100% FDI in aviation sector but the
government has clearly indicated not to go ahead with it, as it has already observed that it is in
itself a Herculean task to even approve 49% FDI. Also, many believe that as airlines are a
large capital based business, it might not be good for the economy to hand over the reign to
international players, who might exploit the entire industry. On the flip side, every industry
gains from perfect competition. Even if there are no economic profits, but at least the industry
is not doomed with limitless losses. Increased competition always leads to better offerings,
greater efficiency, cheaper airfares and more choice to the passengers, apart from access to
capital, global connectivity, technology, management and operational best practices.

GENERAL OBSERVATION

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COMPETITION IN THE AVIATION SECTOR10

Some of the prominent features of civil aviation sector in India include a large number of
consumers (passengers and cargo), a relatively small number of airlines with significant
market share, significant cost barriers to market entry, differentiated services, and competitive
firms affecting each others business decisions. These market characteristics indicate that
India's civil aviation sector has an inherent oligopolistic market structure.

There has been a speculation of a possibility of unfair competition among several airlines due
to a decline in the fuel prices which will attract anti competitive laws. However the above is
only a speculation due to the decreasingly low fuel prices. The low fuel prices have led to
lowering of ticket charges( as earlier fuel charges amounted to 40% of the ticket value).
The global aviation fuel charges as per financial year 2016 have been the lowest since the
past 10 years which has led to an all time low ticket fares in the aviation sector in India in
2016. This has led to a belief that profitability across several airlines in the aviation sector is a
possibility.

Cartelisation
In layman's term cartel is an agreement between rival businesses or firms on not to compete
with each other. They are kept classified and discussions take place informally. The most
common aspect of cartelisation is price fixing. The other aspects are limiting productivity,
hoarding, bid rigging, output levels etc. In economics terminology, cartel usually happens in
an Oligopolistic environment especially in Collusive Oligopoly. Oligopoly refers to an
industry environment where few firms dominate and recognise the rivalry and
interdependence of each other. For every action taken by a firm there will be counter
strategies by the other. Cartels generally operate in Collusive Oligopoly.

In non collusive oligopoly a firm when devising strategies will use random or planned
guesswork and calculations to handle reactions from rivals and consumers whereas in
collusive oligopoly it is centrally commanded by a group of firms. OPEC is one of the best
known examples of all cartels. They determine the costs for aircraft turbine fuel and other

10 http://www.singhania.in/wp-content/uploads/2016/05/AVIATION-LAW-REVIEW-INDIA-FINALIZED-
DRAFT-2-MAY-2016.pdf , last accessed on 22nd October 2016

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aircraft fuel essentials which are then transferred to the airline industry which then affects the
end user. Cartels act as single firms to maximise profits.11

Paradox is the most common one word description by economists for the aviation industry.
Ever since the advent of aviation it has always seen continuous and rapid growth in demand
for services. Any business or industry will do their best to make hay when sun shines,
however the airlines has always been marginally profitable.

The low cost carriers, on the other hand, with a shaky start in the beginning seemed
economically profitable as compared to the regular service providers. No- frills strategy is to
deliver the core product. The core product for airlines would be to transport passengers from
A to B. No major focus is laid on delicious food, seats that would normally come with a full
serviced flight. The European airline industry is more popular with low cost brand names like
Easyjet and Ryanair.

The discussion further, is about a cartel that has been in operation in the no-frills European
airline sector for the past 5 years. The objective is to discuss the factors that will end
collusion amongst the members and to evaluate strategies that will keep the cartel from
breaking apart.

People of the same trade seldom meet together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public, or in some contrivance to raise prices or
would be consistent with liberty and justice.12

Cartel operations are always known to be short lived. The ever present incentive to cheat
amongst the members of a cartel has always lead to withdrawal for firms, and eventually
disbanding the cartel. Individual firms or oligopolistic, in collusion will always have desire to
cut down price or sell more than what the cartel has agreed.

No frills airline have short haul flights and always had one class of service unless a flight
more than two hours long may have two or more class of service. On a single class of service,
cartel members may decide to have a standard price with minor disparities depending on
whether the flight is at off peak or peak hours of service. At seasonal periods the unexpected
11 https://www.ukessays.com/essays/economics/international-cartel-of-the-airline-industry-economics-
essay.php , last accessed on 22nd October 2016
12 Adam Smith, The Wealth of Nations, 1776

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huge rush may favour a particular airline that has better scheduling. This may incite or tempt
the other competitors to join in the foray breaking all the informal agreements. This would be
done by assessing past experience of company or could possibly be the counter measure for
surprises thrown by cartel members. This would also lead to price discrimination for the
consumer since a particular route frequented by several no-frills carriers are being charged
exorbitantly high and vary from one service provider to another.

And those airlines predicting misfortune that they have to fly empty seats may drop the prices
all together ensuring marginal revenue resulting in further price conflict among cartel
members.

In an oligopolistic environment, few no-frills airlines that are not dominant will be a price
taker because of small fleet size and low passenger load factor it will not have any major
contributions to a particular routing. Reasons could vary from off peak routing to poor
scheduling of flights. Even if it did make any kinds of additional revenue it will only equate
to marginal revenue. This could lead for a smaller airline to pull out from the cartel.

Game theory is sort of an umbrella or 'unified field' theory for the rational side of social
science, where social is interpreted broadly, to include human as well as non-human players.
(Aumann 1987)

The objective of game theory is to give everybody in the cartel equilibrium. It provides
strategies for airlines from the host of options available to make the right choice for the
optimum outcome. However, it can be highly unpredictable if an airline adopts a completely
different strategy. This would jeopardise the entire decision making for the businesses and
hence the cartel.

In a cartel, at least one or two airlines will have better standing in terms of fleet size, support
functions like baggage, ramp handlers etc and other such necessities to run an airline
business. Big carriers like Ryanair will be able to get ground support services at cheaper
prices since they provide larger contracts. In the event of a recession, established firms will
try adopting one policy option or its dominant strategy that will be best suited for them
against the interest of the cartel. They are able to do this because of the strong support units
from vendors which allow them stay afloat with marginal revenue.

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Equilibrium for cartel firms will only emerge when all airline companies are happy with their
present strategies based on what their rivals have adopted. For Airline industry profits have
always been seasonal. This makes the predicting the markets continuously unstable.

Cartels fear the potential entrance of new firms eating into the market share. There is a huge
demand in the airlines industry which invites new players in the market. To avoid any further
competition established firms or airlines would increase their fares to the highest price. This
strategy, they believe, can charge their passengers without inducing new firms in to the
competition. However, smaller players in the cartel are also at the receiving end of such a
strategy.13

Other factors that also lead to the disintegration of cartel are low demand, competition
outside the cartel, diversification into a full service or charter service, government or
legislative restrictions etc. Government restrictions appear when low cost carriers may
involve operations in more than one country. Weather is also one of the factors that may
contribute for firm to break away from a cartel. The recent ash cloud crisis in the European
aerospace resulted in $ 1.8 billion loss in revenue by the European carriers. This would mean
a big impact for small carriers in the no-frills sector.

The best interest for all players in a cartel is to remain in collusion. When they come together
they will be able to maximise their profits in aviation industry. Cartels are able to last long
provided they are effective enough.

Collusion will be effective when there are few players in the market. Fewer airlines mean
they can co-ordinate very well and reduce the level of uncertainty. The rivals in cartel will not
have to worry about any surprises strategies by rest. They will be able to monitor each other
very well since they share same airports. The ground staff is outsourced and most airlines will
have the same vendor. The flight operations, scheduling will all be on the lines of the
agreement. Collusion with fewer members will help them agree on price, market share, sales
promotion and expenditure. Fewer firms also mean larger market share and high individual
pay-offs. However if the cartel players are unable to restrict entry of new players the market
share for individual players are reduced and cheating is back on everyone ones mind.14

13 http;//www.gem.sciences/summary, last accessed on 22nd October

14
http://www.iata.org/pressroom/Documents/press_summary_of_proposals_a
ff.pdf, last accessed on 22nd October 2016
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Airlines industry does not always have a stable demand year round. The cartel industry needs
to strategies operations in consultation with all cartel members on flight operations during
poor demand. This would help all airline members to reorganise and replan, not just with
better flight scheduling but also concentrating on other aspects like aircraft maintenance,
crew trainings, product improvisation etc.

The objective for firms to form a cartel is to limit competition and increase profits. Airlines
would need to set a monopolistic agenda by restricting output and increasing price. They may
set fewer flights in a particular sector and raise fares. This would help all cartel members
maximise profits. Cartel members should operate the industry in equilibrium. Equilibrium
must help the airliners increase fares among the profitable routes and at the same time
allocating less profiting sector among all players fairly. It should also provide a methodology
or mechanism to distribute the less profitable routes amongst all players. No-frills airlines
may introduce an incentive structure that may reward based on monitoring each airline for
their operations based on the agreed rules. They may also penalise to prevent any kind of
cheating. Repeated interaction by the no-frills players for future collusive benefits may also
deter cheating.

Every cartel will have a major player. Major players in no-frills airline business like Ryanair
are able to command a price because of the dominant position in the no-frills sector. This
makes Ryanair the price leader in the sector. Collusion may take place informally by smaller
players recognising the fares setters in the industry and will act as followers. This may help
smaller airlines maximise their profits since they can be assured the fare hike is in line with
the industry standards and justified. Cartels may also collude together and raise ticket fares
simultaneously. Such a phenomenon is common in the fuel industry and also difficult to
distinguish. At times a smaller airline may also be known to have good knowledge on pricing
trends in the industry they will also be followed by other cartel members. It is known as
barometric price leadership.

Organisational mechanisms or structures can also be introduced in a cartel. The structure

would be like those of any organisation. The mechanism should incorporate external
fluctuations like environment, government restrictions, fuel prices etc. For no-frills sector
costs need to be kept very low. Environment and fuel hikes leave major impact on revenue.
The mechanisms could involve negotiations on cost of fuel which could be provided at
subsidised rates to every airliner. No-frills airlines need to make significant investment in the
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development of organisational mechanisms and organisational skills so that it makes cheating
a secondary issue and is deemed inappropriate future action by the members.

Research says that some cartels last on an average of 5 years. However, variance in the
duration is high for several other cartels. The no-frills airline cartels need to address problems
of co-ordination, cheating and entry. Cartels that are able to introduce organisational
mechanisms among the members are able to progress as successfully.

The all time low ticket fares in this financial year of 2016 has led to many experts to believe
that cartelisation across several airlines is possible which will attract anti competitive laws
wherein an adverse affect to the market is possible wherein other low operating airlines will
not be able to match the prices offered by the airlines that have formed a cartel.

RECENT INSTANCES OF CARTELISATION15

The Competition Commission of India (CCI) by its recent (Order), levied penalties of
1,516,900,000 (Indian Rupees One billion five hundred sixteen million nine hundred
thousand), 637,400,000 (Indian Rupees Six hundred thirty seven million four hundred
thousand) and 424,800,000 (Indian Rupees Four hundred twenty four million eight hundred
thousand) on Jet Airways (India) Limited (Jet Airways), InterGlobe Aviation Limited
(operators of IndiGo Airlines) and SpiceJet Limited (SpiceJet) (collectively Airlines)
respectively, for indulging in anti-competitive activities. The CCI found the Airlines
indulging in concerted action in Fixing Fuel Surcharge rates (FSC), in contravention of
the Competition Act, 2002 (Competition Act). The complaint against the Airlines, which
included the names of Air India Limited ("Air India") and Go Airlines (India) Limited (Go
Air) was filed with the CCI by Express Industry Council of India (EICI), an apex body
representing the welfare of entities in the express industry. The CCI considering the
precarious position of the airlines business imposed the penalties at 1% of the Airlines
average turnover of the last 3 financial years.

15 https://www.ukessays.com/essays/economics/international-cartel-of-the-airline-industry-economics-
essay.php , last accessed on 22nd October 2016

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CONCLUSION

Indias aviation industry is largely untapped with huge growth opportunities, considering that
air transport is still expensive for majority of the countrys population, of which nearly 40 per
cent is the upwardly mobile middle class.

The industry stakeholders should engage and collaborate with policy makers to implement
efficient and rational decisions that would boost Indias civil aviation industry. With the right
policies and relentless focus on quality, cost and passenger interest, India would be well
placed to achieve its vision of becoming the third-largest aviation market by 2020 and the
largest by 2030.

REFFRENCES

http://www.ibef.org/industry/indian-aviation.aspx

http://www.makeinindia.com/sector/aviation

http://pib.nic.in/newsite/PrintRelease.aspx?relid=146238

https://medium.com/@TIE/fdi-in-aviation-sector-a-bon-voyage-or-just-a-mirage-75b4013c0980#.9rc6cpxns

http://www.singhania.in/wp-content/uploads/2016/05/AVIATION-LAW-REVIEW-INDIA-FINALIZED-DRAFT-
2-MAY-2016.pdf

https://www.ukessays.com/essays/economics/international-cartel-of-the-airline-industry-economics-
essay.php

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