Jet-Kingfisher Merger Competition Issues

Transcription

1 A-380 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 regulator, the MRTP Commission has ordered its investigative wing, the DG (I&R) to commence inquiry into the most talked about Merger of Jet Air Ways and Kingfisher Airlines, India s two largest airlines with a postmerger combined market share of 60 per cent, it is just the time to understand the finer competition issues involved in this Merger and its likely impact on consumers. The Merger will, of course, be justified on the ground of achieving efficiency, which in economic terms, means lowering of marginal costs of operation of both airlines, coupled with the global economic crisis leading to difficulty in raising the capital, the rising aviation fuel bill and their outstanding dues to oil companies et al. While the operational constraints of the airlines may not be doubted, it is imperative to understand the impact of the Merger on competition in the relevant market. Let us not forget the obvious that competition means better choice and lower prices for the consumers and since the consumers, i.e. the air travelers in India had just begun to enjoy the fruits of this competition due to the open sky policy of the government in the postliberalization era leading to the emergence of the so-called low-cost carriers, which made the common man s dream of flying a reality though for a short period, as in the absence of a fully functional and real competition regulator, the competition commission of India, no agency of the government (including the MRTP Commission) was really competent to examine the appreciable adverse effect on competition in the relevant market (for which the competition commission is created and mandated for) due to the Merger of Air-Deccan with Kingfisher and Jet-Sahara which not only reduced the number of players but also led to a rise in air fares of select city pairs. But does every Merger which reduces number of players in the market anticompetitive? Not really so. For 92 A-380

2 2008] Jet-Kingfisher Merger Competition Issues A-381 instance, a Merger among small players to give competition to a large sized player is always pro-competitive and efficiency enhancing for such marginal players. But a Merger between a large and a small player, as happened in the airlines sector in India, does raise competition concerns as it makes an already big player bigger and such merged entity is likely to have a tendency to abuse its dominance for increasing its profits by indulging in any of the anticompetitive practices, such as, imposing unfair or discriminatory conditions, limiting or restricting services to the selected few, denying market access to other players or to even enter into other product or services markets through their dominant position in one product or services market. For example, if permitted, the business class travelers in Kingfisher airlines will be routinely served only kingfisher beers! All these business practices, which may be better known in the Corporate world as tricks of trade are prohibited under the Competition Act, 2002, and are against the spirit of competition, which is the backbone of a free market economy. There have been many cases in the developed world where the competition (or, as some still prefer to call it as antitrust ) regulators have imposed heavy fines on companies indulging in such practices, which resulted in lessening of competition in the relevant market. The recent example of Microsoft, which was fined heavily both in US as well as in the EU, after a prolonged legal battle should serve as a forewarning and can reasonably be cited as a precedent by the competition commission in any future verdict against such practices, which are routinely used in India in the absence of the competition regulator. I would rather not hesitate in calling this delay in making the competition commission fully functional as a carefully planned marriage of convenience between the political powers that be and the already large business houses to avoid unnecessary scrutiny of their anticompetition business practices, like in the developed world, in view of the obvious advantage to both in view of the forth coming general elections in India. This can happen only in India! So what are the competition issues involved in a Merger of two airline companies offering almost identical products and services? The answer is to be found in the competition economics, which is now the essential tool for the ant-trust regulators the world over. Such mergers between direct competitors are known as horizontal mergers in the competition economic parlance and such mergers are known to give rise to two types of competitive harms unilateral effects and coordinated effects. Unilateral effects arise where the mergers create an incentive for the merged entity to increase prices and where the profitability of that price does not depend on the accommodating response by other firms in the market. The basic theory of unilateral effects is that the lost competition due to merger between two direct competitors gives rise to an incentive to increased prices that did not exist prior to that merger due to the internalisation of lost sales. Apart from increase by the new merged entity, there is another round of increase of prices by other firms in the market to keep pace with the new found competitive equilibrium in what is called second round effect thus, consumers stand to lose in all situations post-merger because it is 93

3 A-382 The degree of closeness of competition between the merging firms decides the extent of harm to competition due to unilateral effects. not only the merged entities which would be an incentive to increased price but in the post-merger equilibrium, the other firms will increase price as well. However, the only positive aspect or Defence for the unilateral effects theory of harm is the likely efficiency gains for the merged entity that is where the merger gives rise to reductions in marginal costs for one or both of the merging firms, this can offset the incentive to increase price. But, in order to be able to Act as such, the reduction in marginal costs or the efficiency must be relatively very large. The competitive harms due to unilateral effects are likely to be more prominent in case of merger between firms selling homogenous products or services or even between firms selling close substitutable products or services. In fact, the degree of closeness of competition between the merging firms decides the extent of harm to competition due to unilateral effects. A merger between firms that are each other s close competitors or whose products are close substitutes is more harmful than merger between firms whose products are distant substitutes. As it eliminates the competitive constraint which exists between the parties prior to the merger thereby reducing the effective competition in the market which is always detrimental to the consumers interest. In this unilateral effects theory of competitive harm, the ability of the merged entity to increase prices does not depend upon a cooperative response from the remaining competing firms and hence, it is so called as unilateral effects or noncoordinated effects. According to this theory, such a horizontal merger gives rise to a situation of a single firm dominance which also has a direct relation to market shares held by the merging parties prior and subsequent to the merger. In some western jurisdictions where the some of parties market share is less than a certain threshold, the merger is not likely to be viewed as harmful. The Herfindahl-Hirschman Index (HHI) is usually applied throughout the world to measure the level of concentration in the market and is the sum of the square of each firm s market share in the relevant market. In the EU as well as in the US, safe harbours for permitting maximum mergers are prescribed in terms of the value of HHI. For instance, in terms of HHI, the safe harbours in EU, is if the HHI is between 1,000 to 2,000 and the delta (i.e., the change in HHI) is less than 250; or if the HHI exceeds 2,000 and the delta is below 150 1, whereas in the US, if the delta is less than 100, merger is unlikely to raise concern if the post-merger HHI is in the range of 1,000 to1,800 and if the delta is less than 50, the merger is unlikely to raise concern if the post-merger HHI is above 1, In terms of the market shares, the safe harbours employed in EC is that where firms have a combined market share below 25 per cent, a 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

4 2008] Jet-Kingfisher Merger Competition Issues A-383 lead to unilateral anti-competitive effects. (Recital 32 of ECMR.) 1 Whereas in the US, merger guidelines indicate that unilateral effect would not normally be a concern where the combined market share of the merging parties is less than 35 per cent. 2 Coordinated effects theory of competitive harm, on the other hand, is based on tacit collusions between firms who do not actually merge but behave almost like a cartel in an oligopolistic market. This type of coordination between firms in the same relevant market is arrived without any formal contact between the colluding parties and is most difficult to detect unlike cartels, eve in the most advance jurisdiction and depends heavenly on economic analysis. Symmetry in cost structures and/or capacities, some degree in transparency either in prices, outputs and homogeneity of products are some of the factors that facilitate such tacit coordination. In this theory of competitive harm, the situation of collective dominance is achieved due to coordination between firms without actually entering into a formal merger but resulting to the same harm to the competition, i.e. reducing effective competition in the market. The effect of such dominance is also the same, i.e. increase in prices. This type of collusion is more akin to a cartel though it lacks a formal understanding or meeting of minds between the parties as happens in the case of a cartel. Like a cartel, the participants in the market identify certain terms of coordination, e.g. the posted prices and if any firm in this tacit coordination deviates from the terms of the coordination or in other words cheats, the other participants are The merger between JET- Airways and Kingfisher Airlines, both with a combined pre-merger market share of 60 per cent, the two largest domestic airlines in India, is almost certainly, likely to be blocked for a detailed investigation under Section 6(2A) read with Section 29 of the Competition Act as this merger is, prima-facie, likely to raise unilateral effects concerns able to detect the cheating and punish such a firm by reverting back to competitive prices for certain period in the selected territories of distribution of the said firm as a punishment. Applying the above economics principles to the merger between JET-Airways and Kingfisher Airlines, both with a combined pre-merger market share of 60 per cent, the two largest domestic airlines in India, is almost certainly, likely to be blocked for a detailed investigation under Section 6(2A) read with Section 29 of the Competition Act as this merger is, prima-facie, likely to raise unilateral effects concerns, as stated above. It may be noticed that although the Competition Act, 2002 or the draft Competition Commission of India (Combination) Regulations, available on the official website of the said Commission does not prescribe any safe harbours in terms of either premerger combined market shares or HHI (like the ECMR or the US horizontal merger guidelines), yet the Commission will be bound to take into account the market share of each of 95

5 A-384 the merging parties and the likelihood that the combination would result in the merging parties being able to significantly and sustainable increased prices or profit margins, say, in selected city pairs, e.g. Delhi-Mumbai, Delhi-Chennai and Delhi-Kolkata, etc., which are listed amongst the 14 factors to determine whether the combination (as the merger is defined under the said Act) is likely to cause appreciable adverse effect on competition in the relevant market under Section 20(4) of the said Act. Of course, in case such an inquiry is initiated by the Commission (as and when the enforcement provisions of the Competition Act, 2002 are notified by the Central Government and the full Commission is constituted in terms of the amended Act), the merging parties would have the possibility of failing business or the so-called failing firm and, as stated above, increase in efficiency or nature and extent of innovation, which are also listed as mitigating factors under the said provisions of the Act, as their main defense against such a notice from the commission. Caveat The above view is subject to the alliance, as being reported in the Press, qualifying as a Combination in terms of Section 5(c) of the Competition Act, However, in case the alliance is not a merger but an agreement by way of a joint venture to enhance efficiencies by reducing the operational costs, then such agreement, though between direct competitors, will be not be presumed to have an adverse effect on competition in view of the exemption granted to such agreements under the proviso to Subsection (3) of Section 3 of the said Act. Copyright Comdt. (Retd.) 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 96