Flying in the face of the free market

Business Standard, July 30, 2013

By Pradeep S Mehta

The civil aviation ministry’s proposal to create a cell to keep tabs on airfares defies logic. What it needs is a vigilant competition agency

The proposal by the ministry of civil aviation to create a cell to keep a watch on airfares and report unusual patterns to the Competition Commission of India (CCI) is anathematical to free market principles.

Airlines follow a dynamic pricing strategy of charging passenger fares depending on when a flight is booked or on the simple principle of supply and demand on a particular route at a point of time. For example, one has paid Rs 4,345 from Jaipur to Delhi on some days, and Rs 14,843 on another day. The difference is three times. Many of my bookings were done on one day’s notice and I cannot blame the carriers for “overcharging”. Such is the character of airline passenger pricing. Sometime in the past, when Kingfisher and Jet Airways decided to code-share, one could suspect collusion – though not necessarily so, as the flight pricing may still have been done on a dynamic basis.

Nowadays, Kingfisher does not fly and the competition to Jet Airways is provided by SpiceJet and Air India on this route, but looking at the timings one is often forced to fly Jet, which is an informed choice. If, however, Jet were to practise predatory pricing and, thus, ensured that the other two airlines would give up flying on the Jaipur-Delhi route, then there would be a case for the CCI to check. Predatory pricing may look attractive to a flyer, but in future when other airlines stop flying on the route, it may lead to an exploitative situation. In such cases that have come up before competition authorities abroad, the charge of predatory pricing has often failed, because there were no entry barriers for other airlines to start or resume their flights on the particular route. In fact, in such a situation, market players hesitate to use the weapon of predatory pricing, otherwise they may end up with deadweight losses.

It has also been argued in a Business Standard editorial (“Flighty plans”, July 25) that the Ministry of Civil Aviation is an interested party in the airline sector because it owns and operates Air India. Thus, one cannot expect it to be neutral. For example, all government or sponsored travels have to be undertaken in Air India. This raises the fundamental question of whether Air India should be under the civil aviation ministry at all, and not be under, say, the department of public enterprises. For example, the public sector energy company Eskom in South Africa is not under the energy ministry but under the public enterprises ministry. The arm’s-length principle is also followed in India, as the Railway Safety Commission is under the civil aviation ministry and not railways.

On the other hand, the Cabinet has approved the establishment of a Civil Aviation Authority on July 11. The Bill will now go to Parliament. The new body will subsume the Directorate General of Civil Aviation (DGCA) and will be required to have a transparent system of policing airlines that will include pricing of seats, ensuring safety and navigation standards, with powers to penalise and fine. Airports will continue to be regulated by the Airports Economic Regulatory Authority (AERA). One wonders whether it would be better to amend the AERA Act to do all this rather than create more parking lots for retirees.

Be that as it may, what does happen among airlines the world over, including India, is collusion on cargo freight rates in the garb of one level of fuel surcharge, but not on fares. On January 2, 2013, Consumer Unity & Trust Society (CUTS) sent a preliminary information report to the CCI about collusion by domestic airlines on this malpractice, which included Air India, but one is not aware of the action taken. Earlier, the Express Industry Council of India had also protested to the CCI with copies to the Ministry of Civil Aviation and DGCA. In these complaints, it was pointed out that in June 2008, all airlines charged a flat Rs 5 a kg as fuel surcharge but this went up over time and every airline raised the charges uniformly or in tandem over time. In September, 2012, all private airlines were charging a uniform Rs 13 a kg while Air India was charging Rs 11 a kg. Following that, in November, 2012, all airlines, including Air India, increased the fuel surcharge by 15 per cent within a day or two of the others’ action. In fact, fuel prices had come down in November from the September levels.

This phenomenon is not unique to India. Globally, airlines have been hammered under every possible jurisdiction for colluding on this type of practice. In 2006-07, British Airways, Air France and others were fined billions of dollars by US and European competition authorities for colluding on fuel charges. In 2010, the Korean authority imposed a total fine of approximately $100 million on 19 airlines for a similar malpractice. Similar action was taken by the New Zealand and Australian competition authorities.

Nowhere in the world do governments regulate airfares, but they do expect their competition agencies to take deterrent action against the colluders. The government’s role is to promote competition in the marketplace so that players do not exploit the market.

The writer is secretary general, CUTS International, and chairman, CUTS Institute for Regulation & Competition.

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