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.