Fears of a monopoly

These are exciting times for the Indian civil aviation sector. This week, Jet Airways swallowed Air Sahara for 500 million dollars in an all cash deal, giving birth to the largest private sector airline in this country. The combined entity would control over fifty percent of the market and, currently reports over Rs 7000 crore in revenues. That’s not all. The Jet-Sahara combine would control two-thirds of the parking bays, a crucial and most sought after infrastructure requirement for airlines, in both Delhi and Mumbai airports. And there’s more. The combine would control over sixty percent of the traffic between the nation’s political and financial capital every day.

Just after this deal was signed, smaller players in the field started crying hoarse and made feeble noises about a monopolistic situation created by the merger of India’s top two private sector airlines. Their fears are not misplaced for several reasons. For starters, the other airlines in the fray viz Air Deccan, Kingfisher Airlines, Go Air and SpiceJet are way too small in comparison. For argument’s sake, let’s leave Air Deccan out of this discussion, for it’s relatively older, low-cost player and reportedly has a marketing alliance with Jet in place already. That leaves us with the other three – which are still wet behind the ears and yet to make a big dent on the market leader. That’s not to say that they are insignificant. All three – in a short time – have adroitly positioned themselves in a market that is on the threshold of an explosion. Never before, has the Indian traveler had it so good. Sample this – the average cost of a ticket say between Mumbai and Chennai is around Rs 3500. Given the plethora of fare options - full fare, check fare, discount fares or what have you; the consumer is undeniably enjoying the benefits of competition.

Would this deal create a monopoly?

The law of the land does not term this deal illegal. It does not even call it monopolistic. In fact, monopoly laws in India particularly in the aviation sector are blurred primarily because this is the first instance when the private sector is playing such a dominant role in this industry.

Monopoly, as economics 101 defines, is a situation when there is a single seller, in a given industry. Monopoly, as a concept, is not evil. It is an ideal that every company fantasizes about but competition – the life-blood of free market enterprise – ensures that a monopolistic situation does not arise. There are many companies in several industries that enjoy not just leadership - but a dominant position in the marketplace. For instance, HLL is a dominant player in the FMCG business, whose rivals are much smaller and possess lesser clout in influencing forces that define success in the marketplace. So, dominance, unlike monopoly, is a tangible goal that every company aspires to achieve. What the Jet-Sahara combine has achieved in the aviation sector is market dominance. Now the questions that need to be asked are these: Were the methods used to achieve this status of dominance against the law of the land – both in letter and spirit? Will this deal place the Jet-Sahara combine in a position that will deprive the consumer’s right to choose – both in terms of pricing and quality of service – as against enhancing it?
Road to market dominance

A company’s leadership in market is measured on a quantitative parameter of sales. In rare cases, it may ascend to a position of dominance by virtue of a revolutionary idea - developing an innovative product and, thereby creating a new market for itself. Sony’s Walkman or Apple’s I-Pod are cases in point. These are pioneers whose dominance lasts as long as a me-too product does not arrive in the marketplace.

But there may be a few situations, which require Govt regulation. A dominant player may use unscrupulous methods to influence Government policy to restrict new entrants in the market. Here, the market leader can control pricing and quality of service, which may be detrimental to the consumer. He may also control access to resources – physical infrastructure or manpower. Price them exorbitantly, pushing it beyond the means of competition. This too, deserves regulation.

In the Jet-Sahara deal, the methods adopted to achieve a status of dominance are clearly above board. Jet, a listed company, has played by the book and has been transparent in the process of acquisition. Sahara, despite its dubious pedigree, has snapped a pretty package, way higher than what analysts had predicted.

So, if this acquisition and its process are legal, are the fears unfounded?

Clearly, Jet will resort to business tactics to get returns that justify its huge investment.
But since access to resources is such a crucial aspect of this business, it is imperative of the Government to ensure a level playing field. The aviation business is unique. The Government creates the physical resources that private players pay and use. These may be parking bays, booking counters, license for routes etc. Unlike, say the FMCG business, if HLL’s dominates the distribution network, a worthy competitor or a bunch of them can create a parallel infrastructure. In the case of aviation, that may not be possible . So, if one player controls a significant portion of that infrastructure and capacity addition is not in the hands of market participants, then it creates a skewed market. Therefore, the Jet-Sahara combine may not create a monopolistic situation, but viewed in the context of the Govt being both a competitor and controller of infrastructure, it does creates a bias – particularly for private sector players. In the long term, this may offer an opportunity to the Jet-Sahara combine, to influence pricing or quality of service that may serve its interests or not the consumer. It is this long-term consumer interest that needs to be protected. And, that’s why the Government needs to intervene.

Run up to a political tsunami

2006 assembly elections promises to be the tipping point in Tamil Nadu politics for many contenders and for many reasons. If the sabre rattling, in the run up to the polls, is any proof to go by, it is clear that battle lines have been drawn between the two leading alliances. The DMK-led Democratic Progressive Alliance – the umbrella coalition of opposition parties in the State minus the BJP continues to stay united despite rumours of rumble in the ranks. Jayalalithaa, on the other hand, is still playing her political cards close to her chest. But the gameplan that was drawn by the DPA alliance to oust the Jaya regime, way before the Lok Sabha elections 2004, has been dramatically altered. Let’s look a few reasons why.

Rewind to 2004. Jayalalithaa’s image heightened after she came clean from the charges of corruption that were the very reasons for her humiliating defeat in the previous assembly elections. The High Court clearing her in the infamous TANSI land case was a shot in the arm for the rank and file of the Anna DMK. With renewed vigour, Amma’s popularity reached at an all time high. And here’s when things turned horribly wrong. Three separate events – the Govt employees strike for a pay hike was dealt with an iron hand by the State. In one stroke of political high handedness, Jayalalithaa, passed an ordinance modifying Tamil Nadu Essential Services Maintenance Act (TESMA). Overnight, over 2 lakh Govt employees were sacked. A few months earlier, a similar treatment was meted out to a genuine student uprising. Medical college students across the state protested the mushrooming of private medical colleges. The Director of Medical Education suspended 5000 students across the State – crushing their attempt at a democratic means of dialogue with the Govt. Then came Jaya’s piece de resistance. The Tamil Nadu Legislative Assembly convened an emergency meeting on the last day of the winter session to order the arrest of journalists of The Hindu – for what it claimed “malicious and defamatory reportage against their beloved Amma”. While the Central Govt intervened to broker peace between the editors of the newspaper and the Govt, the death knell for Jayalalithaa had been rung. These ostensibly unconnected events revealed the brute force and the audacity with which the State Government chose to clamp down any form of opposition to its policies. But then, this aggression was short-lived. Jayalalithaa’s power drunk glory came crashing to the ground with the humiliating defeat that the AIADMK front faced in the Lok Sabha elections. Of the 40 Parliament seats (including Pondicherry) – the DMK-led combine swept all the 40 seats. This victory signalled two things: One, the people of Tamil Nadu were clearly miffed with the present regime and had shifted loyalties. Secondly, a point psephologists had predicted, that the combined electoral arithmetic of the DPA coalition had routed the AIADMK’s electoral prospects.

From this defeat, rose another Jayalalithaa. This Jaya would take no more non-populist decisions. She would no more order midnights arrests nor would she direct suspension. Instead, she became the epitome of generosity, re-created the image that of a benevolent mother that was once her political passport. All controversial legislations – TESMA, Forcible religious conversions act, power tariff hike, bus fare hike were revoked overnight. This new-found image of Amma was further bolstered by a remarkable achievement by the Special Task Force in killing Sandalwood smuggler, Veerapan. Although, Veerapan’s death did not garner political mileage, it certainly did wonders to the image of her Government. The characteristic intransigence of the Jayalalithaa regime suddenly was supplanted by transparency and dialogue. This, suddenly, was a Government that took action, that produced results. Or it seemed.

It was during this time, the grand old man of Tamil Nadu politics, was cleverly dotting the i’s of his gameplan. Everything had worked perfectly for Karunanidhi. He quit the NDA and joined the Cong led coalition at the right time, usurped the role of the king maker with finesse, cobbled up a coalition in the State and led it from the front to victory, and installed his grand-nephew and ten others in the Union cabinet. But nature had other plans.

In December 2004, a tsunami, a word that would soon be added to common parlance in India, left a trail of death and devastation in Tamil Nadu. The damage was unprecedented. The rebuilding efforts required the Government to rise above petty political concerns. And that the Jayalalithaa regime did well - to its credit. Even the World Bank has acknowledged that the remarkable repair and relief work carried out by the State Govt. This natural disaster was not factored in Karunanidhi’s political gameplan. Worse, still, the state had more tragedy in the offing. The torrential rains in 2005, caused more death and destruction. Despite the best of efforts, the State Govt’s handling of rehabilitation came in for criticism. Particularly, the stampedes at relief camps were just unpardonable. But were they blips or was it a failure of administrative machinery? Facts would point to the former but the DMK would vouch for the latter. Unquestionably, the healing touch of the State Government has erased the follies of its past from the minds of the people. Karunanidhi understands this better than anyone else. Therefore, he is now re-drafting his plan to take of the challenges of the new reality. As of Jan 2006, the DMK-led coalition has begun issuing the war cry. While Amma is quietly working on building her campaign on her recent achievements. Will the DPA last or will Jaya manage to break it? Will Amma go with the BJP or will she go it alone? These answers will unfold in a few months. Clearly, this is a political tsunami that is waiting to lash the State of Tamil Nadu.