Module_7

MODULE 7
AIR TRANSPORT AND INDIAN COMPETITION LAW

PRICING AND CAPACITY DETERMINATION IN INTERNATIONAL AIR
TRANSPORT
Ø Introduction
§ As the name suggests, this subject involves the fixing of prices for air travel and an airplane’s

carrying capacity in terms of passengers by airline companies.

§ The phrase ‘price determination’ is self-explanatory, it means the fixing of prices of air tickets
by airline companies for air travel keeping in mind various aspects explained in detail at a later
stage.

§ Capacity determination as already mentioned above means the carrying capacity i.e. how many
passengers can a particular airplane carry on one trip.

Ø Determination factors

§ This subject is considered complex. The complexity is due to the involvement of governments
on an international level, international organizations, private companies and last but not the
least the consuming public.1

§ The determination of these prices and capacity are determined by various factors:2

• Five freedoms (unofficially nine). The freedoms are:3

¨ Right to overfly a foreign country without landing

¨ Right to refuel or carry out maintenance in a foreign country

1 Maryland Journal of International Law: Volume 9, Issue 2, Article 33 by Seth E. Lipner
http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1260&context=mjil
2 Supra note 1
3 Chicago Convention, http://www.skybrary.aero/index.php/Chicago_Convention

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¨ Right to fly from one's own country to another

¨ Right to fly from a foreign country to one's own

¨ Right to fly between two foreign countries during flights which begin or end in one's own

¨ Right to fly from one foreign country to another one while stopping in one's own country

¨ Right to fly between two foreign countries while not offering flights to one's own country

¨ Right to fly between two or more airports in a foreign country while continuing service to one's
own country

¨ Right to fly inside a foreign country without continuing service to one's own country

The first five are the officially recognised freedoms and the last four are the unofficial ones.
These freedoms were granted via the Convention on International Civil Aviation, 1944 also
known as the Chicago Convention.4

(i) It is a known fact that various countries enter into pacts or sign various conventions to
benefit themselves and ultimately their citizens.

(ii) It is believed that having the above freedoms/rights is beneficial as with them the
signatory countries decide not to resort in heavy pricing because permission to fly above
their country or to land in their country etc. is already granted. This simply means that
no rent or tax (exorbitant amounts) have to be paid thus reducing the price of the ticket.

¨ Special and excursion fares: Special fares may mean in terms of offering discounts, cheap air
fares, other benefits etc.

4 Supra note 3

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¨ Excursion fares in aviation field means: Discounted fare for a short round trip, offered
with restrictions such as advance purchase requirement and/or minimum and maximum stays.5

My opinion on such fares is that generally to keep up with the competition, when one airline
company slashes its prices or offers discounts the other company does too, this happens both
in the domestic sector (within one’s own country) and the international sector.

• Bilateralism:
In terms of airplane and aviation ‘bilateralism’ can be explained in the following ways, an
airline company can offer international services only upon permission from the country it
wishes to travel to and from. There are two ways to get such permission: either the airline
company does so directly or the company requests its own country via its civil aviation
authority to have a bilateral air transport agreement with the concerned country’s authority.
The agreement in detail will explain the airline’s right to offer transport services to, from and
via that particular country.6

Like I mentioned above having agreements mutually beneficial leads to advantages to airline
companies and its passengers.

• Load factor
It deals with the number of passengers an airplane can carry i.e. it measures an airline’s
passenger carrying capacity.7

Only if an airplane can carry a certain number of passengers, that many passengers will be
allowed. My opinion on this matter is that generally the smaller aircrafts (ATR’s) are no frill
airplanes or low cost carriers and hence cheaper the opposite is applicable for Boeing, they are
bigger, have more services and are priced a little high.

5 Excursion fare, http://www.businessdictionary.com/definition/excursion-fare.html#ixzz3u0C9zQiE
6 The Utilization of the World’s Air Space and Free Outer Space in the 21st Century By Chia-Jui Cheng,
https://books.google.co.in/books?id=nKrO4hCB71AC&pg=PA269&lpg=PA269&dq=bilateralism+in+aviation
&source=bl&ots=erXnL-ERng&sig=i_r-
z6azmkn3JVJ12WPYw3i8ovY&hl=en&sa=X&ved=0ahUKEwjDuK2NvtPJAhWCGI4KHW2tAVEQ6AEIMjA
H#v=onepage&q=bilateralism%20in%20aviation&f=false
7 International Review of Business Research Papers: Vol. 3, No.4, October 2007 Pp.125-133, The Determination
of Load Factors in the Airline Industry by Hashem Salarzadeh Jenatabadi and Noor Azina Ismail,
http://www.irbrp.com/static/documents/August/2007/1423726981.pdf

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• Passenger miles

In simple words, passenger miles, a transportation industry metric calculates the number of
miles travelled by a revenue paying passenger be it in airplane, bus, train etc.8
I believe it is this factor determines if the company is making profits or losses and this is
ultimately the deciding factor in fixing prices or to have large airplanes operate or the small
ones.

• Traffic conferences
International Air Transport Association (IATA), a trade association representing and serving
the airline industry worldwide9 organises traffic conferences for its members, these conference
deal with international traffic matters such as the analysis of operating costs, the fixing of fares,
rates and charges for passengers and cargo, the coordination of timetables and schedules, and
the approval of agencies and their administration.10
I am of the opinion that it is at these conferences that participating countries mutually agree to
follow a fixed form of pricing to ensure competition if fair.

Ø Price determination and Capacity determination

In the previous section we looked at the general factors effecting the price and capacity
determination, now we will look at each of them in detail.

§ Price determination11
The price you pay for air travel to an airline company include a lot of things, like: base fare,
taxes and airport fees, fuel charge, food, seat selection, baggage etc.

8 Revenue Passenger Mile – RPM, http://www.investopedia.com/terms/r/revenue-passenger-mile-rpm.asp
9 http://www.iata.org/Pages/default.aspx
10 Encyclopedia of Public International Law, 5: International Organizations in General, Universal International
Organizations, and Cooperation by Rudolf Bernhardt,
https://books.google.co.in/books?id=mzW0BQAAQBAJ&pg=PA51&lpg=PA51&dq=traffic+conference+aviati
on&source=bl&ots=HBk_d51in6&sig=WL51qCqz_0wvnV5krbnl3_WpjuY&hl=en&sa=X&ved=0ahUKEwjJ1
ZGM59PJAhULT44KHXFgCZwQ6AEIVTAN#v=onepage&q=traffic%20conference%20aviation&f=false
11 How do airlines set prices? by Chris Schlick, published in September, 2013,
https://flightfox.com/tradecraft/how-do-airlines-set-prices

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These things are present for full service airlines and not the low cost ones, the low cost ones
would probably include just base fare, taxes, fuel charge etc.

• At what rate these prices should be fixed are determined by looking into various aspects:

¨ An airline’s first step of price determination is the kind of airplane they would use, an airplane
with less number of seats (an ATR) or the opposite – a Boeing.

¨ Based on the airplane they decide if they should have various classes i.e. economy, business
class, first class etc. each priced differently, the cheapest being economy and costliest being
first class. Usually an ATR does not have this classification.

¨ And also, competition, prices are fixed keeping in mind other airline company’s prices as well.

¨ Prices are determined based on demand and availability. More the demand (during peak hours,
vacation time etc.) costlier the price, the same goes with availability, lesser the seats higher
they are priced.

¨ Price changes as they go closer to departure date. This again depends upon seat availability.
Prices are usually slashed when the airplane is not even 25% to 30% booked and are increased
and made exorbitant when lesser seats are available, it is at this phase that airline companies
make the most profits.

§ Capacity determination

• Obviously it is via the capacity determination that the load factor of an airplane is established.

• I believe the factors effecting capacity of an airplane and ultimately the load factor are:

¨ The capacity determination of an airplane is done based on its model (ATR, Boeing etc.) As
mentioned above ATR’s are small airplanes and Boeing’s are the bigger ones. Bigger the
airplane, more the capacity and vice versa.

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¨ The weight of an airplane is also a determinant of capacity, a plane that weighs less is meant
to be an ATR or a private jet and hence can carry less passengers while on the other hand,
Boeing is heavy and hence has more carrying capacity.

¨ Also, the airline company has to keep in mind factors like the baggage of the passengers, other
cargo, essentials for the passengers to be present in the flight during air time etc. to determine
the number of passengers an airplane can carry.

¨ Airline companies fix capacity based on the areas in which they operate, if companies serve
primary destinations, then the capacity they fix is more i.e. they would use bigger airplanes and
if it is a secondary of tertiary destination then smaller ones are used.
The same rule applies to international operation and local operations. Generally, for local
operations flights with less capacity are used as compared to international operations.
The number of passengers is also a factor, there are cities from which more passengers travel
as compared to others, in such cities big airplanes are used and obviously the smaller ones in
which not much crowd is present.

Ø Conclusion

§ Price and capacity determination is thus one of the basic steps that needs to be undertaken by
an airline company to ensure proper functioning, to continue business and also make profits,
the basic objective of a business and do this by providing proper services to customers of all
walks of life.

§ If this step is taken in the wrong direction it will lead to losses and eventually the airline
company shutting down and withdrawing itself from the playing field of aviation sector.

COMPETITION ISSUES ATTRACTED IN THE AIR TRANSPORT SECTOR

Ø Introduction

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§ The air transport sector in India is developing rapidly with many private companies venturing
into this field and we all know that more the number more the complications and hence many
issues have arisen with the increase in airline companies.

§ The air transport sector too like other businesses is subjected to various rules, laws and
regulations. One such law is the Competition Act, 2002 which regulates competition in India
and by that ensures that anti-competitive practices don’t take place.

§ Alfred E. Kahn, Chairman of the U. S. Civil Aeronautics Board said that “competition must
make the basic decisions about prices and output” but unfortunately even though private airline
companies dominate the aviation sector as compared to the government ones, yet a chunk of
the decision making in various fields of the aviation sector lies in the hands of the
government.12

Ø Market types:

§ A perfectly competitive market is a market situation where all firms sell an identical product,
these firms cannot control the market price, the markets have a small market share, buyers have
full knowledge about the details, freedom to enter and exit the markets.13

§ Monopoly is a market situation where only one seller exists, this seller is selling a unique
product and also he does not face any competition as no other seller exists.14

§ Oligopoly is a market condition where few independent sellers exist; they control the supply
and also the prices. These sellers offer largely similar products.15

12 Supra note 2
13 Perfect Competition, http://www.investopedia.com/terms/p/perfectcompetition.asp
14 Definition of Monopoly, http://economictimes.indiatimes.com/definition/monopoly
15 Oligopoly, http://www.businessdictionary.com/definition/oligopoly.html

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§ The air transport sector is India is considered an oligopoly since it involves a large number of
consumers and a small number of airlines with significant market share and control.16

Ø Competition issues

§ Since an oligopolistic market exists in the aviation sector, the regulations should be such that
a fair and equal competitive playing field is established and also anti-competitive behaviour is
eliminated. However, in this process no barriers for existing sellers or for new comers should
be created.17

§ Some of the issues that the players in the aviation sector face is:

¨ High mortality rate – it simply means that the players in the aviation sector cannot survive
for long periods of time for various reasons. This is evident because five to ten years back
we had as many as ten to twelve dominant airline companies which have now fallen to
six to seven. The high mortality rate exists as airline companies are either not able to buy
airplanes or are not able to absorb market entry costs.18

¨ The Aviation Authority of India (AAI) and the Directorate General of Civil Aviation
(DGCA) are trying to ensure that competition is fair in the market, however investment
constraints are present and an equal playing field is lacking and neither is competitive
equality and neutrality present. This is because of the treatment that India’s national
carrier gets as compared to private carriers.19

¨ A recent trend in the aviation sector is the development of low cost carriers; they are
basically airline companies offering the most basic service in air travel. They have led to
a lot of competition related issues as they offer cheap air travel forcing legacy carriers
i.e. those that offer services like seat selection, food being served etc. to slash their prices
or launch low cost carriers within their company thus facing losses.20

16 Research Study of the Civil Aviation Sector in India by Nathan Economic Consulting India Pvt. Ltd., India
published on 24th January 2012 , http://circ.in/pdf/Civil_Aviation_Sector.pdf
17 Ibid.
18 Ibid.
19 Ibid.
20 Indian Aviation Industry: Issues & Challenges, by Neha Arora, Kamal Kant Bishnoi and Swati Atray,
http://www.indianmba.com/Faculty_Column/FC1149/fc1149.html

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• In the research work submitted by Nathan Economic Consulting India Pvt. Ltd.21 They have
highlighted provisions in various laws, rules and regulations which create barriers and hence
are considered as anti-competitive in nature, some of these provisions are:

¨ Having to deposit a paid up capital based on the services the newcomer wishes to offer.

¨ Levying conditions for conducting operations in the international sector.

¨ Taxes should be taken but not in excessive which is what is happening in the aviation sector.

Ø Effect of these competition issues22

§ The one major effect that the above issues creates is: the number of players are either limited
or the services they offer are bound to be limited

§ These issues further do not allow suppliers to compete in the market.

§ Ultimately these issues don’t allow the players i.e. the suppliers to get any benefits whatsoever.

Ø Conclusion

§ From the above information I am of the opinion that competition should be regulated and
controlled to an extent and to have a fair and equal playing field but not to the extent that these
regulations itself become anti-competitive and cause an imbalance.

CO-OPERATION BETWEEN AIRLINES UNDER CONVERGING COMPETITION
REGIME
Ø Introduction

21 Supra note 19
22 Ibid.

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§ Converge in simple terms means to meet at a point, two different things intersect at a given
time or overlap and hence become similar or same.

§ It is always assumed that laws are there to put restrictions; however they can be beneficial if
we manage to find a common point where our goals, objectives and needs are similar to that of
the law in place.

§ It has been established in the previous section that various laws instead of creating a fair playing
filed are doing the opposite, but if airline companies come together and work out agreements
and understandings (MOA’s and MOU’s) via the provisions of the Competition Act, 2002
23(hereinafter referred to as ‘the Act’) they will enjoy some advantages.

Ø The provisions of the Competition Act and the benefits of airline companies – A
convergence:

§ The Competition Act of India prevents or prohibits certain kind of agreements or certain acts
to happen between various parties via its provisions and it is via these provisions that it
regulates market conditions.

§ Agreements or acts prohibited:

Anti-competitive Agreements:

¨ Section 3 of the Act deals with such agreements and also gives an exhaustive list as to what
acts/agreements are considered anti-competitive.

¨ A simple reading of this Section states that agreements that have adverse effect on competition
within India are prohibited.

¨ The same section also gives a list of agreements which have adverse effect on the market:

23 Competition Act, 2002, http://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf
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(i)Agreements that effect prices be it directly or indirectly.

(ii)Those that control various market related aspects like production, supply investment etc.

(iii)Agreements where the parties have agreed to do business only in a certain geographical
area

(iv)Bid rigging agreements.

¨ The following agreements are considered anti-competitive if they have an adverse effect on

competition in India, these agreements can take place between any person in the chain of
manufacturer to service provider/seller:

(i)Tie-in arrangement: An agreement in which a vendor (seller) conditions the sale of a
particular product on a vendee’s (buyer) promise to purchase an additional, unrelated product.24

(ii)Exclusive supply and distribution agreements:
Exclusive supply agreement: such agreement prevents a supplier from selling to
another buyer ultimately not allowing his entry.25
Exclusive distribution agreement: as the name suggests the manufacturer gives
exclusive rights to the distributor to deal in his products and the manufacturer also states
that he would not engage anyone else for the same.26

(iii)Refusal to deal: A refusal to deal is an agreement between competing companies, or
between a company and an individual or business, that stipulates that they refuse to do business
with another.27

24 Tying arrangement, http://legal-dictionary.thefreedictionary.com/Tying+Arrangement
25 Exclusive Supply or Purchase Agreements, https://www.ftc.gov/tips-advice/competition-guidance/guide-
antitrust-laws/single-firm-conduct/exclusive-supply-or
26 Exclusive Distribution Agreements, http://www.contractology.com/exclusive-distribution-agreement.html
27 What is refusal to deal?,http://business-law.freeadvice.com/businesslaw/trade_regulation/refusal_deal.htm

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(iv)Resale price maintenance: a system in which the price for an item is fixed by
the manufacturer, and the retailer is not allowed to sell it at a lower price.28

¨ Airline companies can protect each other by not having such agreements and even if they do it

should not violate the condition laid down in the Act i.e. causing adverse effect on competition
in India.

¨ Thus the agreements that airline companies can enter into from the above list and not

cause adverse effect on competition in India are:

(i)Airline companies can enter into agreements to regulate prices, they can agree to price air
travel at a reasonable and similar rate so that it’s beneficial to both the company and the
passengers. However, this agreement should not be of the kind which causes barriers to other
airline companies.

(ii)There may be a situation where one airline company has a lot of business from one area but
not from another, the same situation may be present with another airline company wherein this
company may have its majority business from the other’s minority and little business from the
other’s majority. The two can mutually agree to not do business in those areas in which it does
not have a lot of income via its operations so that the two can concentrate on the areas where
it receives its majority income.

Abuse of Dominant Position:

¨ Section 4 of the Act deals with abuse of dominant position and like Section 3 provides a list
that is considered as abuse.

¨ Before we look into the list let us understand what dominant position is. Dominant position
simply means when one company enjoys dominance in the market via its strength, can operate
independently and affect its competitors in ways favourable to it.

28 Resale price maintenance, http://www.businessdictionary.com/definition/resale-price-maintenance.html
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¨ From a reading of Section 4 as well as cases decided by the Competition Commission of India
we understand that the position of dominance is not bad but its abuse is.29

¨ Now let’s look at the conditions that are laid down in the Section that constitute abuse of
dominant position:

(i)If unfair conditions or prices are laid down in purchasing or selling of services, including
predatory pricing 30(such pricing/condition is allowed to meet competition only)

(ii)Limitation/restriction in things related to market, development etc.

(iii)Laying down of unfair conditions to seal/finalize contracts.

(iv)Using the dominant position in one market to protect itself in another market or enter
another market.

¨ None of the airline companies present today in the market hold a permanent and clear dominant
position. However, on some occasions one airline company is dominant over the other via its
market share or prices etc. In such cases, it is preferable that they simply enjoy the high, reap
benefits out of it but not affect another’s business via its actions, those which are mentioned
above.

¨ If airline companies mutually agree not to levy unfair conditions/prices on its passengers then
it’s a win-win for both the companies themselves and the passengers who have chosen them
for flying.

¨ Airline companies should share each other’s ‘know how’ i.e. the knowledge they have in
matters relating to air travel sector, any developments that a particular airline company has
invented or researched on should be published so that it is beneficial to all.

29 Jupiter Gaming Solutions Private Limited vs Government of Goa and Anr., (2012) 106 CLA 339 (CCI)
30 Predatory price means to sell goods at rate lower than the actual cost to eliminate competition.

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¨ Existing airline companies at the same time should encourage new players who have entered
the market and not have agreements amongst themselves that will create barriers and obstacles
for the newcomer eventually leading to his downfall.

Mergers and Acquisitions – Combination:

¨ Like dominant position having a merger or an acquisition under Section 5 of the Act that is
named as combination is not wrong.

¨ Merger means the combining of two or more companies, generally by offering the stockholders
of one company securities in the acquiring company in exchange for the surrender of their
stock.31

¨ Acquisition is a corporate action in which a company buys most, if not all, of the target
company's ownership stakes in order to assume control of the target firm. Acquisitions are
often made as part of a company's growth strategy whereby it is more beneficial to take over
an existing firm's operations and niche compared to expanding on its own. Acquisitions are
often paid in cash, the acquiring company's stock or a combination of both.32

¨ So the basic difference between merger and acquisition is that in the former the entire company
is taken over by another company and in the latter a part of the company is taken over.

¨ Like anti-competitive agreements, such mergers and acquisitions are not allowed if they have
an adverse effect on competition in India.

¨ If done the right way and for the right reasons mergers and acquisitions are highly beneficial
to companies and the same goes with airline companies too.

¨ Advantages of merger and acquisitions are:

31 Merger, http://www.investopedia.com/terms/m/merger.asp
32 Acquisition, http://www.investopedia.com/terms/a/acquisition.asp

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(i)The companies merging can take advantage of each other’s market reach, business research
etc. and grow leaps and bounds.

(ii)Having the above advantage means more business which is nothing but more profits and
thus solidifying its position in the market.

(iii)Two company’s merging means it becoming one big company, the benefit of this is to be
able to conduct large scale operations and generally the discounts offered in various fields to
companies where large scale operations take place is more as compared to others.33

(iv)Mergers and acquisitions also protect a company that is facing losses or is not able to
survive for various reasons from closing and thus giving it a new life.34

(v)Up to a certain extent they also help in dealing with competition in the international sector.35

(vi)A merger or an acquisition clearly helps in increasing the market share of a company. 36

(vii)Reducing costs and overheads through shared marketing budgets, increased purchasing
power and lower costs.37
Ø Conclusion
From the above research we can conclude that a thing trying to become a barrier can be made
a bridge in the direction we want it to be in if we cooperate and think together.

33 What are the advantages of mergers?, http://kalyan-city.blogspot.in/2012/08/what-are-advantages-of-
mergers.html
34 Benefits of mergers, http://www.economicshelp.org/microessays/competition/benefits-mergers/
35 Ibid.
36 Supra note 33.
37 Benefits of mergers and acquisitions, https://www.nibusinessinfo.co.uk/content/benefits-merger-or-acquisition

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