Airline cartel in India: Penalty imposed by CCI, is it justified?

Background

Express Industry Council of India filed a complaint (No. 30 of 2013) before the Competition Commission of India (“CCI”) against Jet Airways, Indigo, SpiceJet, Air India and Go Air (collectively, “Opposite Parties”) alleging that the Opposite Parties had formed a cartel to introduce Fuel Surcharge (“FSC”) for transportation of cargo which was anti-competitive in terms of the Competition Act, 2002.

It was also alleged that though the levy of FSC was introduced as extra charges linked to the fuel prices there has been no corresponding decrease in the same with a fall in the fuel prices.

Case and investigation proceedings

CCI by its order dated September 9, 2013 held that the averments and allegations made in the complaint prima facie indicate the existence of an agreement between the opposite parties to determine the fuel prices which requires a detailed investigation by the Director General (“DG”).

Thereafter, the DG issued a notice dated November 27, 2013 calling for, among other things, certain information on ownership pattern, organization structure, copies of memorandum of association and articles of association of the Opposite Parties in order to investigate the matter.

The DG submitted his investigation report dated February 4, 2015 with the CCI wherein it was concluded that there is no sufficient evidence to conclude the existence of a cartel in terms of Section 3 (1) read with Section 3(3) (a) of the Competition Act.

Order of the CCI

While rejecting the investigation report of the DG, vide its order dated November 17, 2015 CCI held that Jet Airways, Indigo and SpiceJet have acted in concerted manner in fixing and the revising the FSC rates and thereby contravened the provisions of the Competition Act.

Concept of ‘agreement’ explained

On the definition of term CCI opined that:

“the definition of “agreement” as given in Section 2(b) of the Competition Act requires inter alia any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings. The definition, being inclusive and not exhaustive, is a wide one. The understanding may be tacit and the definition covers situations where the parties act on the basis of a nod or wink. There is rarely a direct evidence of action in concert and in such situation the Commission has to determine whether those involved in such dealings had some form of understanding and were acting in cooperation with each other. In the light of the definition of the term “agreement”, the Commission has to find sufficiency of evidence on the basis of benchmark of preponderance of probabilities”.

Existence of hub and spoke model

The CCI held that, the fact that since the prohibition on participating in anti-competitive agreements and the penalties the offenders may incur being well known, it is normal that such anti-competitive activities are conducted in a clandestine manner, where the meetings are held in secret and the associated documentation reduced to a minimum. CCI further opined that, even if the Commission discovers evidence explicitly showing unlawful conduct between enterprises such as the minutes of a meeting, it will normally be only fragmentary and sparse, so that it is often necessary to reconstruct certain details by deduction. In most cases, the existence of an anti-competitive practice or agreement must be inferred from a number of coincidences and indicia which, taken together, may, in the absence of any other plausible explanation, constitute evidence of the existence of an agreement.

Further in their arguments before the CCI, Opposite Parties stated that information on price behaviour of competitor’s price revision on FSC is received through multiple sources including common agents. In response, the CCI while concluding this to be a case of collusive behaviour held that:

“It is clearly evident that the airlines were well aware of the changes in FSC rates, if any, by their competitors in advance. The increments of the rates on same dates or nearby dates are reflective of some sort of understanding amongst the Opposite Parties”.

Lack of explanation offered by the Opposite Parties

CCI was not satisfied by the arguments, evidences and economic studies offered by the Opposite Parties. Further in its analysis of the facts of the case, where, the Opposite Parties admitted that the representatives of the Opposite Parties met several times before increasing the FSC price, but failed to disclose any evidence (in form of minutes of meetings, e-mail exchanges etc), CCI opined that:

“In these circumstances, the plea taken by the parties contending that no records of the meetings where FSC rates are determined and maintained does not inspire any confidence”.

CCI further held that:

“The unreasonable explanation of increase of FSC rates clubbed with no data on cost analysis, evasive replies and no documents despite admitting to the fact that meeting/ discussions took place with regard to FSC rate only further confirm the fact that airlines were acting in concerted manner. Though there is no evidence of direct meetings, the OPs participated in passive manner as they had the requisite means to access and exchange information though their common agents and circulars. This also shows that the OPs had a way to express their intentions in the market indirectly. In view of the foregoing, it is opined that the OPs have acted in parallel and the only plausible reason for increment of FSC rates by the airlines was collusion amongst them”.

Cartel activities are per se illegal

CCI, as held in various previous cases, stated that:

“In case of agreements as listed in section 3(3) (a) - (d) of the Act, once it is established that such an agreement exists, it will be presumed that the agreement has an appreciable adverse effect on competition; the onus to rebut the presumption would lie upon the opposite parties. In the present case, the opposite parties could not rebut the said presumption. It has not been shown by the opposite parties how the impugned conduct resulted into accrual of benefits to consumers or made improvements in production or distribution of goods in question. Neither, the opposite parties could explain as to how the said conduct did not foreclose competition”.

Analysis of the case

In times to come, this order of CCI will be discussed threadbare and at lengths by practitioners across sectors. This order may not be a full proof order and may face reversal (just like recent orders in the matter of Thomas Cook case and Chemist and Druggist Association, Ferozpur case) at the appellate tribunal stage. My reasons are as follows:

• Mere similarity in prices or other features that may be observed in an oligopoly which are due to unilateral decision making by the firms alone cannot be considered as proof of an anti-competitive agreement between the firms in the absence of substantially compelling plus factors.
• Market practice of knowing the prices or price list of the competitors through the common distributors, stockists, agents etc., are a normal practice in India and is a price discovery mechanism and not price collusion mechanism. In India, often various players in an industry follow the market practices of the leader of the industry.

Conclusion

COMPAT will have to weigh this case and ponder over the fact that will penalizing Opposite Parties will be justified only for the reason that the Opposite Parties had no evidence for the meeting which occurred between the representatives and can this be a sole argument for penalising these parties. In case COMPAT is in agreement with CCI, then plethora of cases in the nature of hub and spoke cartel will come up and the enterprises in India will have to jack up their competition compliance mechanisms.