Competition Commission of India has ordered airlines´ to desist from indulging in anti-competitive practices and has imposed penalties on leading airlines. The moot question is whether this is a well-grounded move.
The Express Industry Council of India had filed information against five airline giants (Jet Airways, IndiGo, SpiceJet, Air India and Go Airlines) pursuant to which the Competition Commission of India (CCI) has, on 17th November, imposed penalties of 1 per cent of the average turnover of the last three financial years - amounting to Rs.257.91 crore - on three of them: Jet Airways, IndiGo Airlines and SpiceJet.
CCI based its order on the ground that they were guilty of cartel in the air cargo industry, undermining economic development in a developing country. The competition regulator also ordered the airlines to cease and desist from indulging in anti-competitive practices. Express Industry Council of India informed CCI that some of the major airlines had acted in concert by introducing fuel surcharge (FSC) for transporting cargo even though the same was not provided under any law, and further, increasing such charges from time to time in a concerted manner.
Fuel surcharge rate
FSC is an important component of the overall pricing of the total cargo charges and generates significant amount of revenue for all the airlines. The primary factors that were relied upon by the Commission to establish such cartel activity are the absence of any co-relation between FSC and fuel prices, lack of proper justification on the methodology adopted for computing FSC, similar instances of increase in FSC by different airlines at specific points of time, possibility of commercially sensitive information being passed on by agents.
The Informant is an apex body of leading express companies, including several international express companies such as Blue Dart, FedEx, DHL, etc. According to the complaint, in May 2008, certain domestic airlines in India introduced a fuel surcharge (FSC) for transporting cargo at a fixed uniform rate of `5 per kg. It was further alleged that the FSC rate had in fact increased by almost the same rate and same date by all the opposite parties (OPs). One of the main issues the CCI looked at was whether the OPs operated in concerted manner while fixing the FSC.
The CCI took into account various factors that are taken into consideration by the airlines while calculating the overall pricing of the air cargo charges, e.g., airway bill fee, freight documentation, X-ray and delivery order charges, apart from FSC. They also took note of the fact that the air cargo rates for any airline vary from sector to sector, flight to flight, on the nature of the cargo, on the weight of the cargo, flight timings, belly space and several other factors. Therefore, the practice of having similar FSC rates for the airline companies suggested collusion amongst these companies while fixing such charges.CCI observation
CCI observed that apart from the change in price of Air Turbine Fuel (ATF), which is the main factor considered for determining FSC by all the airlines, several other factors are relevant, e.g., market conditions and trends, pricing by competitors, USD-INR rate of exchange, operating costs, infrastructure, and manpower. Therefore, change in ATF price is the only common factor amongst all airlines and would not justify similar changes in FSC rates on various occasions. The Commission also observed that none of the airlines were able to furnish any data or cost studies to support how FSC rates were determined and also could not relate the reasoning by the OPs regarding the changes in FSC rates due to the changes in ATF prices and USD rates to any logical or legal justification.
The Commission noted that while a few of the airlines had charged the FSC at the same rate of `5 per kg at the same time, none of them could provide any valid explanation, nor furnish any methodology or market study on the basis of which the rate was imposed. Whenever the FSC of one airline went up, it was followed by the rest of the airlines simultaneously on several occasions. This was termed as ´parallel behaviour´ of the airlines and was a primary evidence for holding existence of cartel amongst the airline companies.
Though there was no evidence of direct meetings, the Commission came to the conclusion that the airline companies participated in passive manner as they had the requisite means to access and exchange information through their common agents and circulars. CCI further noted that the only plausible reason for the FSC increment was collusion between airlines which resulted into indirectly determining the rates of air cargo transport in terms of the provisions contained in section 3 (3)(a) of the Act. One of the important issues that this recent decision raises is whether the existence of parallelism in prices of competing entities without proof of any concerted action amongst them can be conclusive evidence of cartel activities. Price parallelism is a well-known concept in competition jurisprudence. As explained in various decisions by the European Commission, it is not unlawful for an enterprise to take prices charged by its competitors into account when setting its own prices as long as such decision is taken independently. Yet, the Commission seems to have deduced the existence of a cartel based on the parallel movement of FSC among the airlines.
The only plausible explanation in the order is the statement by some of the company executives that there was a possibility that the cargo agents may have passed on information about the FSC rates to other airlines. The Commission appears to have been influenced by the fact that the fuel surcharge so levied by the airlines had no correlation to fuel prices and was devised to avoid payment of commission to agents that is otherwise payable on cargo charges.
It is not unknown for competitors to take pricing decisions having regard to the prices of competitors in an oligopolistic market. In an imperfect market where there are only few service providers, competitors often follow a price leader and increase their prices instead of trying to win a bigger market share through price competition. Such conduct is the outcome of various factors, e.g., profit maximisation since there is plenty for all despite price rises, opportunity to wipe out past losses, prevailing demand in the market, customer loyalties and preferences, other facilities provided to consumers to compete on the quality of services. Therefore, a finding on price parallelism without a detailed analysis of the market structure and customer behaviour may result in very wrong inferences.
Similarly, the possibility that such pricing information may have been passed on by the agents to the competitors do not necessarily point towards a concerted action. In fact, the assumptions would be very much to the contrary that competing enterprises adapted the pricing pattern of the price leader on gaining such knowledge from the market. Industrial and market intelligence are well-known tools of business planning. It therefore becomes necessary to demonstrate on evidence the existence of some concerted action amongst enterprises before a conclusion of existence of cartel can be drawn. If this is not so, it can set a wrong precedence of cartels where the competing enterprises may have actually decided to follow the market trends.
The Commission, in some of its recent orders, has demonstrated a sense of haste in arriving at a conclusion of guilt on half-baked evidence and assumptions, which makes such orders open to criticism in appellate courts. Being a comparatively new Commission, this can erode the credibility of the forum not only before higher courts, but also for industry circles and consumers. The Competition Act, 2002 has vested unprecedented powers in the Commission to penalise errant enterprises to secure an atmosphere of fair market competition. It will be necessary for the Commission in the initial years to tread cautiously on the path of procedure and adjudication while examining allegations of cartels. Cartels are always formed behind closed doors and in secret meetings. Therefore, the Commission and the DG will have to invest time and resources to investigate and unearth these conspiracies and create formidable material evidence that can conclusively and unmistakably establish the links required to establish cartel activities by infringing parties. Otherwise, imposition of huge fines on the basis of assumptions and loosely grounded materials susceptible to be set aside in higher courts, will take away the threat of penalties and defeat the very purpose of the Act to deter anti-competitive practices in the market.
This article has been authored by Sakya Singha Chaudhuri, Partner, HSA Advocates.