Jet-Kingfisher Merger-Competition Issues
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A-380 Competition Law Reports [Vol. 1
Jet-Kingfisher Merger—Competition Issues
Comdt. (Retd.) M.M. Sharma*
Blatant or sensational promotion associated with Jet-Kingfisher merger has
left market with innumerable doubts be it be the stakeholders or consumers
regarding the possible effects of this alliance. What this means to the
competition regime when the alliance has been made to shed costs and improve
efficiency and when the Competition Commission is non-functional. The author
Comdt. M.M. Sharma tend to analyse the deal in the light of the various
competition issues primarily the issue of merger and as to whether the deal
is anti-competitive.
Now that the soon to be defunct better choice and lower prices for the
regulator, the MRTP Commission has consumers and since the consumers,
ordered its investigative wing, the DG i.e. the air travelers in India had just
(I&R) to commence inquiry into the begun to enjoy the fruits of this
most talked about Merger of Jet Air competition due to the open sky policy
Ways and Kingfisher Airlines, India’s of the government in the post-
two largest airlines with a post- liberalization era leading to the
merger combined market share of emergence of the so-called low-cost
60 per cent, it is just the time to carriers, which made the common
understand the finer competition man’s dream of flying a reality though
issues involved in this “Merger” and for a short period, as in the absence
its likely impact on consumers. The of a fully functional and real
“Merger” will, of course, be justified competition regulator, the competition
on the ground of achieving efficiency, commission of India, no agency of the
which in economic terms, means government (including the MR TP
lowering of marginal costs of operation Commission) was really competent to
of both airlines, coupled with the examine the “appreciable adverse
global economic crisis leading to effect on competition in the relevant
difficulty in raising the capital, the market” (for which the competition
rising aviation fuel bill and their commission is created and mandated
outstanding dues to oil companies for) due to the Merger of Air-Deccan
et al. with Kingfisher and Jet-Sahara
While the operational constraints of which not only reduced the number
the airlines may not be doubted, it is of players but also led to a rise in air
imperative to understand the impact fares of select city pairs.
of the Merger on competition in the But does every Merger which reduces
relevant market. Let us not forget the number of players in the market anti-
obvious that competition means competitive? Not really so. For
92 A-380 Oct. 08 - Dec. 082008] Jet-Kingfisher Merger—Competition Issues A-381 instance, a Merger among small rather not hesitate in calling this players to give competition to a large delay in making the competition sized player is always pro-competitive commission fully functional as a and efficiency enhancing for such carefully planned marriage of marginal players. But a Merger convenience between the political between a large and a small player, powers that be and the already large as happened in the airlines sector in business houses to avoid India, does raise competition “unnecessary” scrutiny of their anti- concerns as it makes an already big competition business practices, like player bigger and such merged entity in the developed world, in view of the is likely to have a tendency to abuse obvious advantage to both in view of its dominance for increasing its the forth coming general elections in profits by indulging in any of the anti- India. This can happen only in India! competitive practices, such as, So what are the competition issues imposing unfair or discriminatory involved in a Merger of two airline conditions, limiting or restricting companies offering almost identical services to the selected few, denying products and services? The answer market access to other players or to is to be found in the competition even enter into other product or economics, which is now the essential services markets through their tool for the ant-trust regulators the dominant position in one product or world over. Such mergers between services market. For example, if direct competitors are known as permitted, the business class horizontal mergers in the competition travelers in Kingfisher airlines will be economic parlance and such mergers routinely served only kingfisher are known to give rise to two types of beers! All these business practices, competitive harms – unilateral effects which may be better known in the and coordinated effects. Corporate world as “tricks of trade” are prohibited under the Competition Unilateral effects arise where the Act, 2002, and are against the spirit mergers create an incentive for the of competition, which is the backbone merged entity to increase prices and of a free market economy. There have where the profitability of that price been many cases in the developed does not depend on the world where the competition (or, as accommodating response by other some still prefer to call it as “anti- firms in the market. The basic theory trust”) regulators have imposed heavy of unilateral effects is that the “lost” fines on companies indulging in such competition due to merger between practices, which resulted in lessening two direct competitors gives rise to an of competition in the relevant market. incentive to increased prices that did The recent example of Microsoft, which not exist prior to that merger due to was fined heavily both in US as well the “internalisation” of lost sales. as in the EU, after a prolonged legal Apart from increase by the new battle should serve as a forewarning merged entity, there is another round and can reasonably be cited as a of increase of prices by other firms in precedent by the competition the market to keep pace with the new commission in any future verdict found competitive equilibrium in against such practices, which are what is called “second round” effect routinely used in India in the absence thus, consumers stand to lose in all of the competition regulator. I would situations post-merger because it is Oct. 08 - Dec. 08 93
A-382 Competition Law Reports [Vol. 1
interest. In this unilateral effects
The degree of closeness theory of competitive harm, the ability
of competition between of the merged entity to increase prices
the merging firms decides does not depend upon a cooperative
the extent of harm to response from the remaining
competition due to competing firms and hence, it is so
unilateral effects. called as unilateral effects or non-
coordinated effects. According to this
not only the merged entities which theory, such a horizontal merger
would be an incentive to increased gives rise to a situation of a “single
price but in the post-merger firm dominance” which also has a
equilibrium, the other firms will direct relation to market shares held
increase price as well. However, the by the merging parties prior and
only positive aspect or Defence for the subsequent to the merger. In some
unilateral effects theory of harm is the western jurisdictions where the some
likely efficiency gains for the merged of parties’ market share is less than
entity that is where the merger gives a certain threshold, the merger is not
rise to reductions in marginal costs likely to be viewed as harmful.
for one or both of the merging firms, The Herfindahl-Hirschman Index
this can offset the incentive to (HHI) is usually applied throughout
increase price. But, in order to be able the world to measure the level of
to Act as such, the reduction in concentration in the market and is
marginal costs or the efficiency must the sum of the square of each firm’s
be relatively very large. The market share in the relevant market.
competitive harms due to unilateral In the EU as well as in the US, safe
effects are likely to be more prominent harbours for permitting maximum
in case of merger between firms mergers are prescribed in terms of the
selling homogenous products or value of HHI. For instance, in terms
services or even between firms selling of HHI, the safe harbours in EU, is if
close substitutable products or the HHI is between 1,000 to 2,000 and
services. In fact, the degree of the delta (i.e., the change in HHI) is
closeness of competition between the less than 250; or if the HHI exceeds
merging firms decides the extent of 2,000 and the delta is below 1501,
harm to competition due to unilateral whereas in the US, if the delta is less
effects. A merger between firms that than 100, merger is unlikely to raise
are each other’s close competitors or concern if the post-merger HHI is in
whose products are close substitutes the range of 1,000 to1,800 and if the
is more harmful than merger between delta is less than 50, the merger is
firms whose products are distant unlikely to raise concern if the
substitutes. As it eliminates the post-merger HHI is above 1,800.2
competitive constraint which exists In terms of the market shares, the
between the parties prior to the safe harbours employed in EC is
merger thereby reducing the effective that where firms have a combined
competition in the market which is market share below 25 per cent, a
always detrimental to the consumers’ merger between them is unlikely to
1 EC Commission guidelines on horizontal mergers, 2004[ECMR] (paragraph 20)
2 US Horizontal Merger Guidelines (revised 1997)
94 Oct. 08 - Dec. 082008] Jet-Kingfisher Merger—Competition Issues A-383
lead to unilateral anti-competitive
effects. (Recital 32 of ECMR.) 1
The “merger” between JET-
Whereas in the US, merger Airways and Kingfisher
guidelines indicate that unilateral Airlines, both with a
effect would not normally be a concern combined pre-merger market
where the combined market share share of 60 per cent, the two
of the merging parties is less than largest domestic airlines in
35 per cent.2 India, is almost certainly,
Coordinated effects theory of likely to be blocked for a
competitive harm, on the other hand, detailed investigation under
is based on “tacit” collusions between Section 6(2A) read with
firms who do not actually merge but Section 29 of the
behave almost like a cartel in an Competition Act as this
oligopolistic market. This type of
merger is, prima-facie, likely
coordination between firms in the
to raise unilateral effects
same relevant market is arrived
without any formal contact between concerns
the colluding parties and is most
difficult to detect unlike cartels, eve able to “detect” the cheating and
in the most advance jurisdiction and “punish” such a firm by reverting back
depends heavenly on economic to competitive prices for certain period
analysis. Symmetry in cost structures in the selected territories of
and/or capacities, some degree in distribution of the said firm as a
transparency either in prices, punishment.
outputs and homogeneity of products Applying the above economics
are some of the factors that facilitate principles to the “merger” between
such tacit coordination. In this theory JET-Airways and Kingfisher Airlines,
of competitive harm, the situation of both with a combined pre-merger
collective dominance is achieved due market share of 60 per cent, the two
to “coordination between firms” largest domestic airlines in India, is
without actually entering into a almost certainly, likely to be blocked
formal merger but resulting to the for a detailed investigation under
same harm to the competition, i.e. Section 6(2A) read with Section 29 of
reducing effective competition in the the Competition Act as this merger is,
market. The effect of such dominance prima-facie, likely to raise unilateral
is also the same, i.e. increase in effects concerns, as stated above. It
prices. This type of collusion is more may be noticed that although the
akin to a cartel though it lacks a Competition Act, 2002 or the draft
formal understanding or meeting of Competition Commission of India
minds between the parties as (Combination) Regulations, available
happens in the case of a cartel. Like on the official website of the said
a cartel, the participants in the Commission does not prescribe any
market identify certain “terms of safe harbours in terms of either pre-
coordination”, e.g. the posted prices merger combined market shares or
and if any firm in this tacit HHI (like the ECMR or the US
coordination deviates from the terms horizontal merger guidelines), yet the
of the coordination or in other words Commission will be bound to take into
cheats, the other participants are account the “market share of each of
Oct. 08 - Dec. 08 95A-384 Competition Law Reports [Vol. 1
the merging parties” and the “nature and extent of innovation”,
“likelihood that the combination which are also listed as mitigating
would result in the merging parties factors under the said provisions of
being able to significantly and the Act, as their main defense against
sustainable increased prices or profit such a notice from the commission.
margins”, say, in selected city pairs,
e.g. Delhi-Mumbai, Delhi-Chennai Caveat
and Delhi-Kolkata, etc., which are The above view is subject to the
listed amongst the 14 factors to alliance, as being reported in the
determine whether the combination Press, qualifying as a “Combination”
(as the merger is defined under the in terms of Section 5(c) of the
said Act) is likely to cause appreciable Competition Act, 2002. However, in
adverse effect on competition in the case the alliance is not a “merger” but
relevant market under Section 20(4) an agreement by way of a joint
of the said Act. venture to enhance efficiencies by
Of course, in case such an inquiry is reducing the operational costs, then
initiated by the Commission (as and such agreement, though between
when the enforcement provisions of direct competitors, will be not be
the Competition Act, 2002 are notified presumed to have an adverse effect
by the Central Government and the on competition in view of the
full Commission is constituted in exemption granted to such
terms of the amended Act), the agreements under the proviso to Sub-
merging parties would have the section (3) of Section 3 of the said Act.
“possibility of failing business” or the
so-called “failing firm ” and, as stated Copyright © Comdt. (Retd.)
above, increase in efficiency or M.M. Sharma
* The author, a former Additional Registrar, Competition Commission of India, is now
a freelance writer on competition matters and legal practitioner. Comments may be
shared on mmsharmacg@rediffmail.com
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