Opinion Collision over collusion

Economic reforms have demanded progressive liberalisation and the shedding of stifling government controls on the market. The benefits have been obvious: in the aviation industry we have larger numbers of operators and flights,broader choice,and more competition to win the passengers’ patronage. In this context,bulldozing by the government is anachronistic and ultimately,could create problems of its own. Controls mean room for rent seeking,crony capitalism,corruption and unhealthy lobbying,as we are witnessing elsewhere. We don’t need more of that. In that sense,Vijay Mallya is right in saying that government should not be lightly intervening in the markets.

The government’s focus should be on structural reforms in the sector,that would remove capacity constraints,bring down entry barriers,and open space for competition. For instance,why has Air India lagged behind in augmenting capacity? And by what logic are major international airlines not allowed to have stakes in the domestic market — we might welcome investment by diaper manufacturers but not by experienced airlines,as Ratan Tata observed of the strange logic of government policy. Once structural constraints have been removed,the markets should work better on their own,without spasmodic muscle-flexing by the government.

It is also no solution to create an independent regulator for the aviation industry,as some have suggested. A sector regulator may be justified in sectors where there are natural monopolies (for example,an airport or transmission line),or in network industries (like telecom),or where there may be asymmetries of information (like medical practice). But in other industries,a sector regulator is misplaced; instead,the markets should discipline enterprise behaviour. Where competition prevails,if one enterprise raises prices,business will be diverted to its rivals.

The responsibility of maintaining oversight in unregulated sectors should rightly belong to the Competition Commission of India (CCI),which has the mandate and powers under the Competition Act,a law that few in government seem to love or understand,but enough are straining to block (the law minister at a recent conference admitted that while initially he did not fully appreciate the Competition Act,he has now come around. We need more such turnarounds). In the event that the airlines (or some of them) collude to raise fares jointly or that any of them enjoys a dominant position,and abuses it,they are in infringement of the Competition Act,and the CCI has enormous powers to inquire and impose deterrent punishment.

The airline industry,unfortunately,has an unenviable reputation in antitrust. In several recent cases it has been handed huge penalties. The European Commission recently fined 11 carriers a total of 799 million euros for operating a worldwide cartel for over six years in cargo services. The dirty 11 included: Air Canada,Air France-KLM,British Airways,Cathay Pacific,Japan Airlines,SAS,Singapore Airlines and Qantas. In 2008,Qantas agreed to pay a fine of 20 million Australian dollars,the second largest price-fixing fine in Australian history,for its part in the international air freight cartel; Qantas publicly apologised for its conduct. Some British Airways executives were recently extradited to the US to serve prison sentences on cartel charges. In India,some years back,the CCI,though it had no statutory powers then,had to step in to prevent the domestic airlines from allegedly cartelising under the umbrella of their trade association.

If there is any collusion between the airlines in hiking fares or other charges,the matter should be brought before the CCI,or the CCI can initiate the inquiry on its own if it finds a prima facie case. The Competition Act is unique in India for welcoming whistleblowers; so if a party to the alleged cartel approaches the CCI with vital information on the cartel,it can hope to escape punishment,as indeed Lufthansa and Swiss did in the above mentioned cargo cartel. If there is a whistleblower out there,let her come forward.

The writer is former head of the Competition Commission of India and now runs a specialised law firm