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The CCI’s Jet-Etihad combination order: Ambiguous and incomplete

Jet-Etihad: CCI must learn better research
Jet-Etihad: CCI must learn better research
Delhi high court advocate Sudipto Sircar argues that the Competition Commission of India’s (CCI) surprisingly deficient market research before approving the Jet-Etihad combination on 11 December, has put an otherwise desirable investment into jeopardy by exposing the combination to inevitable litigation.

The Jet Airways – Etihad Airways investment proposal is by far one of the biggest as well as the most complex Combination Proposal which the Competition Commission of India (CCI) has had to handle till date.

There is no doubt that whatever may be the compliments or the criticisms which the Commission has received (and there have been plenty of both, not to mention the first ever appeal to the Competition Appellate Tribunal (CAT) against a combination order!), the much needed experience and insight which the Commission has gained and will gain as its order now enters the corridors of litigation in assessing this transaction, will aid in its growth and better understanding of the aviation market and combination assessment in general in the future.

The emphasis of the author in this article is therefore not directly on the issue on the merits of the case (i.e., whether the Combination should have or should have not been approved) but on the ambiguities and vacuities which are prevalent in the majority order of the Commission. The author has on earlier occasions also criticised past orders of the CCI on these grounds, and continues to do so against the above mentioned order as well.

The order indicates not only a lack of clarity, but also incomplete research on the part of the Commission into the total corollary effects of the combination.

THE COMBINATION PROPOSAL

The parties sought the Commission’s approval for the acquisition of 24 percent equity interest in Jet Airways by Etihad Airways and in relation to all the rights and benefits, which the parties had commercially agreed pursuant to a shareholder’s agreement (SHA), a commercial cooperation agreement (CCA) and an investment agreement (IA), all of which were executed on 24 April 2013. The above mentioned documents as well as a corporate governance code (CGC) executed between the parties were further amended on certain occasions, the most significant one being due to the conditions imposed by the Foreign Investment Promotion Board (FIPB) while clearing the investment into Jet Airways.

The most important document of all the above is the commercial cooperation agreement (CCA), which, inter alia, created the following obligations between the parties:

  1. The parties would frame co-operative procedure in relation to
    (i) joint route and schedule coordination;
    (ii) joint pricing;
    (iii) joint marketing, distribution, sales representation and cooperation;
    (iv) joint/reciprocal airport representation and handling;
    (v) joint/reciprocal technical handling and belly-hold cargo and dedicated freight capacity on services (into and out of Abu Dhabi and India and beyond);
  2. The parties would aim to establish centres of excellence either in India or Abu Dhabi;
  3. Etihad Airways would recommend candidates for the senior management of Jet;
  4. Jet Airways would use Abu Dhabi as its exclusive hub for scheduled services to and from Africa, North and South America and UAE;
  5. Jet would refrain from entering into any code sharing agreement with any other airline that has the effect of:
    (i) bypassing Abu Dhabi as the hub for traffic to and from the above said locations, or
    (ii) is detrimental to the co-operation contemplated by the CCA.

The last two conditions were obviously the most worrisome conditions from a competition prospective.

At this juncture, the issue on the execution of agreements with potentially anti-competitive effects before receiving a formal approval from the Commission, which is regarding the agreements entered between the parties into on 26.02.2013 for the sale of three landing/take-off slots at the London Heathrow Airport by Jet Airways to Etihad Airways and the pursuant lease back of the same slots back to Jet Airways (collectively called the “LHR Transaction”) has already been taken cognisance of by the CCI and it suffices to say, the Commission has recently by its order dated 19 December 2013 imposed a penalty of Rs 1 crore for “consummating parts of the deal without approval of the CCI”.

The merits of this order are outside the scope of the present article.

An incomplete analysis

The Commission is correct in using the origin and destination (O and D) principle to define the relevant market for the purpose of the transaction. According to this principle, every combination of a point of origin and a point of destination is considered to be a separate market from the consumer’s viewpoint. In other words, it is correct to identify all the routes between India and Abu-Dhabi as the relevant market to be taken into consideration to determine any prospective anti-competitiveness. It is also correct to conduct a separate analysis for each and every route, both direct and indirect, from any airport in India to the Abu-Dhabi hub. In other words, the essence or the trajectory of the Commissions reasoning is correct. It is after this take-off that the Commission begins to fly into pockets of turbulence.

Over emphasis on airport substitutability

The first problem in the order is of the reasoning on airport substitutability. To quote paragraph 33 of the order verbatim:

“33. In arriving at the relevant market definition the Commission made a distinction between different groups of passengers and observed that Indian passengers on the 9 direct overlapping O&D pairs are generally more price sensitive and less time sensitive. Moreover, passengers living in the catchment areas of two or more airports may consider those airports as possible substitutes when choosing which airport they fly from and which airport they fly to. For instance, it must be stressed that in the case of passengers travelling to Abu Dhabi, there are 3 international airports in UAE that passengers might consider as substitutable with each other i.e. Abu Dhabi (AUH), Dubai (DXB) and Sharjah (SHJ). Depending on the O&D pair, either DXB or SHJ airport can be considered in the same O&D pair. Abu Dhabi, Dubai and Sharjah airports are within 2 hours distance from each other. Several carriers serve Delhi and Mumbai with direct flights to/from DXB. Etihad and Emirates offer free shuttle bases between Abu Dhabi and Dubai, and there are other modes of public transport between them as well. The direct horizontal overlap between Jet and Etihad occurs between the UAE and India as origin and destinations points.” (Emphasis added)

The author is of the opinion that the reasoning on airport substitutability has been over-emphasised. And the reasoning for this is best elucidated in the dissenting order, which is as follows (coincidently, also paragraph 33):

“33. Parties have claimed that Dubai, Sharjah and Ras Al Khaimah are substitutable destinations to Abu Dhabi as they are located in the same catchment area and the respective airlines of Abu Dhabi (Etihad) and Dubai (Emirates) offer chauffeur/shuttle services to these destinations. However, the details of overlapping routes provided by the parties show that passengers travelling to Dubai are not using Abu Dhabi as a substitutable option. For instance, out of 5,79,292 passengers who travelled between Kozhikode and Dubai during 2012, only 2 passengers flew through Etihad (i.e. travelled to Dubai via Abu Dhabi). Similarly, out of 12,71,202 passengers who travelled between Abu Dhabi and India (9 different call points) during 2012, only 4 passengers have used the services of Emirates (i.e. travelled to Abu Dhabi via Dubai). It is also noticed that the websites of none of the Indian carriers, including Jet, Indigo and Spicejet, show Dubai as substitutable to Abu Dhabi or vice versa. This shows that neither the Indian airlines, including Jet, nor the consumers treat Abu Dhabi and Dubai as substitutable.” (Emphasis added)

Moreover, the fallacy which arises in the above argument on substitutability is that Etihad Airways would only land at Abu-Dhabi and not at either of the two airports, since it is its hub. The last two clauses to the C.C.A. would also ensure that flights of Jet Airways would also come to Abu Dhabi. The argument on the airport substitutability runs on the assumption that consumers would choose to use these airports as substitutes.

However, as every practical flyer/consumer is well aware, a passenger or consumer would never change airports since in this case in would require changing the airline, which would be financially regressive. It is a common practice in the international airline industry to reduce the ticket price by providing a discount on the overall price for the passenger if the passenger travels on such inter-continental flights for a longer duration on the flight. In other words, if an individual was travelling from Delhi to Brussels, it would be cheaper for the passenger to stick with Etihad or Jet all the way from Delhi to Abu-Dhabi to Brussels rather then get off at Abu Dhabi and then take an Emirates flight to Brussels.

A call for meticulous research

Both the majority order and the dissenting order attempted to analyse the effect of the deal on the nine “city pairs” between India and Abu-Dhabi where Jet Airways and Etihad Airways both fly to and fro from and currently provide competition to each other. Again, the methodology was correct but what is disheartening is the lack of research which seems to have been invested by the Commission into this assessment. The comments almost seem cursory!

To this extent, there is a vast difference between the level of research in the main order and the dissenting order on the issue. The dissenting order, through a detailed assessment, and with clear tabular descriptions, creates a convincing opinion on the anti-competitive threats which arrive on some of the routes.

Furthermore, the analysis of the Commission itself showed that indirect flights by all airlines were comparatively negligible, with direct flights commanding significant proportion of the flights between Abu-Dhabi and India. For example, between Mumbai and Abu Dhabi, it is on record that direct flights constituted 87 per cent of the total number flights, whereas indirect flights accounted for the remaining thirteen percent. Similarly, in the Delhi – Abu Dhabi route, 74 per cent were direct flights, while the remaining 26 per cent accounted for indirect flights by all airlines on the route.

Thus, the data provides us with clear indications on the flawed logic of the majority order in assuming the importance of indirect flights on combating competition restraints which arise as a consequence of the combination as it gives a clear indication that consumers mostly do prefer direct flights rather than indirect flights while travelling between India and Abu-Dhabi, contrary to what the majority order believes. This may also be due to the fact that the majority order seems to have not given serious consideration to the primary purpose of the deal from the point of view of Etihad being a national airline, i.e., raise the traffic passing through its “hub” airport.

A lack of effort on the part of the commission

In the author’s opinion, the majority order as a whole gives the impression of an incomplete and a hurried analysis of the combination. The reading of the order as a whole gives the impression of the writer trying to quickly finish the project, even at the cost of ambiguity. And what has not helped is the innumerable times additional information and amended information was supplied by the parties to the combination during the course of the hearing. Here again, the observation in the dissenting order is a compelling read:

“22. The information presently available with the Commission has been largely furnished by the parties to the combination only. It has not been possible, despite efforts, to test the veracity of this data independently, as also to collect all the data which would be necessary for this exercise, within the limited assessment mandate at the stage of prima facie consideration of the proposed combination. This has assumed additional importance in view of the frequent variations/changes made in the information furnished by the parties from time to time, the fact that this is a very dynamic market with no independently credible data-base available with any recognized institution/authority, and the various competition concerns arising due to the proposed combination. It should be possible to obtain much of this data from other airlines as also from airport operators. Once the data is available, it would be possible to develop potential alternate future scenarios, with the help of experts who could be engaged by the Commission for this purpose, if necessary.” (Emphasis added)

Conclusion

Despite the lacunas in the majority order, in the end, it is probable that the combination deserves clearance from the Commission. It is equally pertinent that the Indian aviation sector, due to faulty policies and flawed managerial choices, now requires such consolidation and investment.

However, it warrants a debate as to why a combination proposal, into which so little in-depth research was conducted by the Commission itself in the first place, was allowed to be cleared.

The order has itself observed that the parties were primarily responsible for the delay in clearance due to the innumerable times additional information as well as amended information was supplied and it was also agreed by the parties in an undertaking filed by them before the Commission that the parties would not raise an issue of elapsing of two hundred an 10 days, as there was a “continuing defect” due to the time period taken by the parties to submit the final transaction documents to the Commission, hence there really was no such urgency.

It is this hastiness to assess and clear which has resulted in so many questions being raised on different aspects of the combination and which ironically, may now prevent the conclusion of the transaction in this financial year.

Sudipto Sircar is an advocate at the Delhi high court and the founder of the Indian Competition and Anti-trust Blog.

Photo by RHL Images

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