On 1st September, the Competition Commission of India (CCI) gave the green signal to one of the country’s largest mergers in the civil aviation industry- Vistara and Air India merger, subject to certain compliances. Vistara, registered as ‘Tata SIA Airlines Limited’ is the brand name of the joint venture (51:49) of Tata Group and Singapore Airlines Limited (SIA). Air India, on the other hand, is wholly owned by Tata Group.
The merger finally sees the light of day after satisfying the fair trader regulator with its clarification that it shall not have any adverse impact on competition and hence, should not be investigated.
From a competition law standpoint, the intriguing part of the merger is that it can effectively pave a path for Air India to be a formidable force to be reckoned with. It is likely that post-merger, Air India will enjoy the largest and second-largest positions among the country’s international and domestic airlines (after Indigo) respectively. That leaves us with an apprehension of duopoly in the aviation industry with Air India-Vistara and Indigo.
Trends of Mergers & Acquisitions in Aviation Industry
Mergers and acquisitions are often opted by firms to achieve their financial and strategic goals. While both the terms are used interchangeably, academics cite some procedural differences between the two.
There are majorly three kinds of mergers and acquisitions; namely horizontal, vertical and conglomerate, which are taken as a recourse to enhance both the financial and operational synergies of the new or merged firm. While operational synergies refer to the production efficiencies, financial synergies lead to cost effectiveness by ensuring low cost of capital and increased borrowing power.
Studies conducted so far indicated that the performance of a merged firm may vary depending upon the nature of the industry in which it exists. Thus, it becomes imperative to solely rely upon the merger instances in the Indian aviation industry to draw a conclusion regarding the potential anti-competition effects of a merger.
In 2007, the market structure of the Indian aviation industry underwent an important change post-mergers of Kingfisher and Deccan, Jet Airways and Sahara, etc. These mergers created an industry which was highly concentrated, raising questions of anti-competitive effects.
A report by the CCI stated that “a combination like a merger with a large market share may indulge in collusion to control price along busy routes by virtue of control over time slots” and that it may also reduce vigorous contestability. In fact, incidents of price parallelism and similar market shares and share of slots between two dominant firms were noticed during this period.
A quick glance at the new merger deal
In August 2023, the Indian domestic aviation industry witnessed a remarkable growth with substantial increase in passenger traffic by 22.81% year on year basis. In terms of market share, Indigo retained its dominant position with maximum passenger traffic and a market share of 63.3%, followed by Air India (9.8%), Vistara (9.8%) and AirAsia India (7.1%). SpiceJet left AkashAir behind in the charts by capturing a share of 4.4%.
Vistara, this year around managed to grab the second position with a market share at par with Air India, which is noteworthy because not only it managed to uplift its share but also it recorded a load factor higher than that of SpiceJet. For several months, Vistara and SpiceJet were vying neck and neck but Vistara finally overtook SpiceJet, which for many months had it above the 90% mark. In respect to on-time performance (OTP), Vistara surpassed its rivals to top the charts. OTP being related to operations management, it is a crucial part because it builds reliability and influences ticket sales and brand name.
It is pertinent to note as per the Director General of Civil Aviation (DGCA) report, the market shares of Indigo and Air India together constituted around 90% in July, 2023 with both of them flying with sufficient passenger traffic. Considering SpiceJet has financial and fleet-related troubles to grapple with, AkashAir is facing grounding issues and shortage of pilots, and GoFirst has been entirely grounded since May 2023, the Indian skies most likely will continue to be ruled by Indigo and Tata Group airlines.
Thus, the data is indicative of the fact that while bigger airlines are getting bigger, smaller ones are still struggling to sustain in the highly competitive aviation market. Both Indigo and Air India are poised to expand their reach by adopting numerous tactics.
Eyeing an enormous share, the CEO of Air India said that they plan to enter into lease agreements for additional aircrafts and to launch premium economy class in some of their long-haul international flights in 2022. They are shifting to ChatGPT for replacing the archaic paper-based practices with the aim to navigate consumer’s preferences in terms of destination and price. In November 2022, it also announced its intent to shut Vistara as a separate entity and to join hands to make Air India bigger than ever.
Emerging duopoly-like situation in the Aviation Industry
Duopoly means two suppliers or firms dominate the entire market and control all essential determinants of market growth and structure. Aviation sector is very price-sensitive, which essentially denotes that the price of the service will have influence over consumer’s willingness to avail the same.
Taking the market data into account, it is beyond doubt that the aviation industry is heading towards duopoly but to anticipate to what extent duopoly can affect all the stakeholders is the real challenge.
Price, being an important factor of attracting consumers, if controlled by only two dominant players, it will certainly create a worrisome situation for the smaller rivals in the market. This will put an indefinite end to price wars. With fewer competitors, there will be a surge in demand and capacity constraints among the airlines, which will lead to airfares going through the roof.
As the giant deal is approved, sky-high airfares are expected to be the ‘new normal’ and that might disrupt the government’s bid for improving accessibility to air travel. A large chunk of the population might as well switch to some other affordable mode of transformation like railways or buses, which would greatly affect the growth curves of the aviation industry.
The other important consequence is that the smaller rivals will soon be driven out or be exposed to existential crises, which will lessen the competition, leaving consumers with very few options.
With significant air traffic rights and invaluable slots, Vistara will bring Air India massive synergies to reign as one of the largest airlines. Concentration in the aviation industry may be beneficial to bring profitability and sustainability in the industry.
The sustainability of competition, which is at stake, is something that needs to be addressed with certain measures by the CCI and the government.
Government by way of schemes like UDAAN and initiatives like disbursement of Viability Gap Funding to some airlines, who are also exempted from GST payment, may consider to continue subsidising and incentivising the struggling airlines. This will effectively help them compete in the industry and ensure airfares do not rise.
Post deregulation of the aviation industry, prices have been observed soaring high. Recently, the government recommended a mechanism within the high Reservation Booking Designator, which is to be monitored by the DGCA. This particularly shall ensure prices are monitored in some or the other way.
While smaller rivals are bound to face uncertainties and challenges. Smaller players may survive the notorious competition because of their loyalty and reasonable pricing unless they are on the brink of collapsing. With adequate support to the airlines, the downsides of this merger may be minimised.