by Noyonika, Junior Editor at CBLT*
INTRODUCTION
The aviation industry is inherently oligopolistic, with a few large players. Between 2000 and 2010, the industry consisted of fierce competition by its 8 to 10 prominent players. However, with the departure of some of the major carriers, like Kingfisher Airlines and Jet Airways, coupled with the monumental rise of low-cost carriers like IndiGo becoming the undisputed market leader , things changed dramatically. The industry has evolved from being dominated by the public sector to being a largely private sector.
The rise of IndiGo to almost 50% domestic market share does raise apprehensions about possible abuses of market power. While dominance per se is not prohibited under competition laws, the serious apprehension is that IndiGo may use its position to stifle competition. The activities of IndiGo need to be closely monitored by the Competition Commission of India (CCI) CI and other regulatory authorities to help ensure anti-competitive practices are avoided and a level playing field persists for all players in the market. However, it is also necessary to balance this oversight to avoid hindering the ease of doing business and creating disincentives for entrepreneurs, which could impact the country's economic growth. It must, therefore, be done in a manner that ensures oversight accompanies a balanced regulatory approach through regular auditing, clear guidelines, and data-driven surveillance. Similarly, one can enlist the support of industry players in oversight by having an enabling environment for whistle-blowers, periodical market reviews, and resultant change in regulations with regards to dynamic market situations—all that ensure oversight is not too restrictive but is still effective.
While it is true that that simply have a large market share does not imply an abuse of dominance but since the Competitions Act of India, 2002 states that to establish an abuse of dominance a large market share is the primary precursor. Thus, while constant vigilance will result in stifling of business activity and may create new barrier for entry but it is still reasonable to keep a reasonable level of surveillance on the activities of major players to prevent a future abuse of dominance The key issue here is whether the dominant player engages in practices that harm competition and consumers. Therefore, it is essential to carefully monitor and regulate the conduct of dominant players like IndiGo to ensure they do not engage in anti-competitive practices that could stifle competition and harm consumer welfare.
The stringent regulatory requirements coupled with the inherent capital-intensive nature of the market create significant entry barriers, making it difficult for new entrants to penetrate the market. Fleet and equity requirements, along with high costs such as Air Turbine Fuel (ATF) taxes, pose considerable challenges to operations. Additionally, the Route Dispersal Guidelines (RDG) mandate airlines to operate in remote areas, which further increases entry barriers.
SHIFTING MARKET DYNAMICS AND GROWING DOMINANCE
The aviation industry has always been a playground of volatility, but what happened after the exit of Jet Airways was more telling. The abrupt exit of one major player opened up a gap on the market front. Now, IndiGo, already a formidable player at that moment, could not afford to miss this chance of catapulting its market share quite significantly.
The more IndiGo comes to dominate the market, the more acute the concerns about abusing its market power. Ensuring that Indigo does not undertake practices that will be detrimental towards competition and consumers will be the challenge before the CCI. The regulatory framework will have to evolve to address the special characteristics of the aviation sector, where coordinated behaviour on the part of a few dominant players can easily set in. The inadequacy of the current framework lies in several areas:
1. The Role of Regulatory Bodies
There are numerous agencies in the regulatory framework of the civil aviation sector, with resultant overlapping jurisdictions. While DGCA regulates issues relating to safety and operation, CCI functions under the umbrella of the policy framework to ensure competitive markets. Such intersections of regulatory domains may result in conflicts and efficiency losses, thereby complicating issues related to anti-competitive practices. The DGCA remains primarily concerned with safety and operational regulations, while the mandate for ensuring competitive markets rests with the CCI. Therefore, dual oversight is bound to result in regulatory gaps or even areas of conflicting mandates, which dominant players can exploit.
Further, certain practices could fall through the cracks because neither body has complete oversight. Matters such as loyalty programs or code-sharing arrangements have operational and competitive elements. These may be approved by DGCA from the point of view of safety and operations without examining their anti-competitive effects, but have to be dealt with separately by CCI. In addition, this kind of duplication might further lead to inefficiency, whereby airlines have to adhere to overlapping or even conflicting regulations by the two bodies, adding to administrative burden on them and hence operational costs. This will also make the regulatory process slow, thereby further complicating the landscape.
For example, the case of Express Industry Council of India vs Jet Airways and Ors was revealing regarding the inability to regulate an oligopolistic market effectively. Coordination of the behaviour of the airlines was proven, but this is relatively easy given the market structure. This case identifies the necessity of clear mechanisms of regulation being in place for prevention and effective deterrent of such practices.
2. Barriers to Entry
The high barrier to entry is the single most prominent obstacle in the path of increasing the competitiveness of the aviation sector. The new entrants face stern resistance from the existing players due to formidable obstacles in the form of stringent regulatory requirements, large capital investments, and high cost of operations. Among various regulatory requirements, the most challenging is the RDR, which stipulate compulsory operations on less profitable remote routes for operating on lucrative metro routes. This thereby increases operational complexity and a financial burden for new entrants already struggling with start-up costs and regulatory compliance.
Besides, high costs attributed to taxes that relate to ATF increase the cost for the airlines. Fuel costs make up a great part of the operational expenses of an airline. Hence, problems related to high ATF taxes in India further compound this problem. Fleet-related requirements also involve a heavy capital investment, as a minimum fleet of aircraft is required which any new entrant would find financially hard to manage.
Another challenge for new entrants has been getting a slot at the right airport. Major airports have limited slots, and the established airlines have taken the prime slots. Prime slots at major airports are handed out competitively, and hence established players usually have the upper hand in opportunities, which means that new airlines struggle to serve popular routes. On many airports, some dominant players also control the supporting infrastructure, which further complicates the entry of new players.
3. Market concentration
There are a number of problems caused by market concentration, relating directly to pricing and service quality. To the extent that players like IndiGo gain the reputation of being market leaders, the greater the pricing power they will be able to exert, thereby giving them a strong ability to charge higher fares without fear of losing passengers to competing airlines. This may result in inflated air fares, reducing accessibility to air travel for a larger part of the population.
Also, with minimal competition, the incentive to improve service decreases. Dominant airlines may not feel any need to improve the quality of service, and as a result of it, the travel experience of passengers weakens. Passengers would bear all sorts of agony through delayed flights, poor in-flight services, and reduced frequency in routes that are not much profitable.
The lack of competition also stultifies innovation. Often, new entrants come with new practices and technologies that raise the performance of the industry as a whole. However, these new players are prevented from market entry by the high barriers to entry, and the sector is deprived of potential innovations.
THE NEED FOR COLLABORATIVE REGULATION
Plugging these gaps would require collaborative regulation between regulatory bodies, industry stakeholders, and government entities. The CCI, DGCA, and other relevant agencies have to work in tandem on the development of comprehensive regulatory frameworks so that there is competition, verification of safety standards, and operational efficiency. Industry actors—airlines and suppliers alike—have a responsibility too. They can do this through open and non-discriminatory business conduct that will foster competitive and innovative market conditions. In many instances, closer cooperation between the airlines, the regulator, and other players in this value chain may be in a position to help detect and resolve potential anti-competitive problems before they turn serious.
Moreover, public entities should embrace such initiatives by providing funding as well as policy support. Any reduced barrier to entry through the hefty investment in infrastructure, reduction of operational costs, and simplification in the regulatory processes increases competition.
Conclusion
The issues in the oligopolistic airline industry are varied and require an all-round approach to ensure this market becomes competitive, fair, and consumer-friendly. The huge market share held by dominant players like IndiGo raises valid concerns over potential misuse of market power; at the same time, fine balance has to be struck so that business operations are not stifled and new entrants not discouraged. The proposed solutions are as follows:
1. Strengthening of Regulatory Frameworks:
The strengthening of the current regulatory frameworks in a much more cohesive form, so as not to allow this unique characteristic of the aviation sector to get compromised further, has become of paramount importance. CCI and DGCA should work together, and the roles and responsibilities of both authorities must be well defined so as to avoid jurisdictional conflicts. In fact, the constitution of an integrated oversight body may be formed so that all the regulatory processes can be smoothened while bringing forth a more efficient monitoring system that addresses both safety and competition concerns simultaneously.
2. Reducing Entry Barriers:
Reducing entry barriers can increase competition. This could be achieved by making the process of setting stringent regulatory requirements, such as the Route Dispersal Guidelines, less arduous. Furthermore, reduction in the taxes on Aviation Turbine Fuel and financial incentives for new entrants also help overcome some of the huge capital and operational costs required for entry. Moreover, there should be simplification of the slot allocation process and guarantee of access to the airport infrastructure by new players at fair prices.
3. Incentivizing Innovation and Service Quality:
The industry should foster innovation by subsidizing new entrants who can bring new ideas and technologies to the industry. The regulatory bodies can do this by providing grants or tax breaks for R&D in aeronautical technologies. Service quality can be enhanced by institutionalizing and strongly implementing consumer protection laws, which will hold airlines accountable for service levels, ensuring that dominant firms do not compromise on passenger experience due to lack of competition. Furthere it is important to make the public aware of these laws and their rirght to create a sense of accountability and responsibility on the airlines which will lead to improved service quality as well as create a system of checks and balance.
4. Increasing Sustainability:
To this end, promoting sustainable practices within the aviation sector holds immense importance for a comprehensive regulatory overhaul. It will not only help address the environmental concern by way of offering regulatory incentives on adopting fuel-efficient technologies and bringing down carbon emissions, but also help the airlines by way of reduced operation costs, attracting new entrants into the market.
These are a few proposed solutions that could potentially make the aviation industry more competitive, innovative, and consumer-friendly. At the same time, the regulatory bodies have to update themselves to the current market dynamics and technological developments so that there will be a vibrant, healthy and competitive aviation sector for all stakeholders' good.
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