Jet-Etihad Deal and its Competitive Concerns

Submitted by Sachidanand Kandloor A109 MBA (Law) 2nd Year

Under the Guidance of Prof Bhargesh Ojha

Facts of the Case

The Indian government (GoI) liberalised its foreign direct investment (FDI) policy and placed a 49%
ceiling on foreign involvement in the country's civil aviation sector. A national airline of the United
Arab Emirates (UAE), Etihad, planned in 2013 to purchase 24% of Jet, a publicly traded corporation
founded in India. The Government of Abu Dhabi owns Etihad in its entirety, and its main businesses
are international air passenger transportation services, commercial vacation services, and cargo
services.
In addition, it is said to own shares in Air Berlin, Air Seychelles, Virgin Australia, and Aer Lingus
totalling 29.21%, 40%, 10%, and 2.9%, respectively. Similar to other companies, Jet specialises in the
low-cost, full-service transportation of passengers by scheduled flights to/from India, as well as cargo
maintenance, repair, and overhaul, and ground handling services.
The Foreign Investment Promotion Board (FIPB), the Security Exchange Board of India (SEBI), and
the Cabinet Committee on Economic Affairs all accepted the plan (CCEA).
Following that, CCI was presented with the Investment Agreement, Shareholders Agreement, and
Commercial Cooperation Agreement between Jet and Etihad for approval. The CCI evaluated the
specific effects of the merger on air passenger services and, as a result, on competition in India. This
case has been regarded as a watershed one in the aviation industry.
Issue Raised and Observation thereupon
When assessing the proposed merger, CCI was only required to take into account one key question:
whether or not the merger of Jet and Etihad would significantly reduce competition in India. 3
Consequently, the finding is as follows:

Issue 1: Whether the proposed combination will have AAEC in India?

In order to determine whether the proposed merger will have AAEC on the relevant market, CCI first
analysed the current case's "relevant market."

Based on the place of origin or destination, it was determined that the international passenger air
transport market was a pertinent market in this situation (O&D). As a result, every one of these
O&Ds represented a separate route, and each distinct route represented a distinct relevant market.
The following factors were taken into account while determining the appropriate market:

1. The interchangeability of direct and indirect flights between O&D.

2. The substitution of rival indirect flights between O&D.

3. Substitution between various passenger classes and the in-flight services provided to them.

4. Time and cost-conscious travellers (business/vacation).

5. India's open skies policy in regards to foreign air freight transportation and Etihad not
participating in domestic (Indian) aviation.

CCI came to the conclusion that the following would be the relevant market in the current case:

1. O&D from or finishing in 9 cities in India to/from UAE.

2. O&D on the overlapping routes of the parties to the combination beginning in India or ending
there to/from overseas destinations.

Appreciable Adverse Effect on Competition

Now that the market in question had been identified, CCI set out to determine whether or not there
would be any AAEC for such routes. As routes were transnational, CCI emphasised the need of trans-
boundary competition while confirming AAEC with this proposed combination. It was noted that
Etihad and Jet operated on 38 flights to and from India, and that each of these routes had at least
one competition.

With the exception of seven locations, where Jet and Etihad together held a combined share of more
than 50%, all other locations had a lower combined share. Additionally, of these 7 destinations, on 3
routes, one had a stake of more than 50% and the other had a share of less than 5%. As a result, the
market share changed after the purchase, but not enough to noticeably impact the dynamics of the
rivalry.

However, CCI noted that while assessing the network impacts, the evaluation must examine
potential network effects of the proposed combination in addition to the O&D pairings. It was
highlighted that higher network effects result from the complementary nature of Jet and Etihad's
routes. Hubs, improved access to gates, slots, and other market-connecting infrastructure interfaces.
Contrary to point-to-point O&D pairings, systems were reported to be becoming more competitive.

High market shares of Jet (India) and Etihad (Abu Dhabi) in their respective hubs do not, therefore,
indicate that there is little rivalry.
Abu Dhabi as the exclusive hub
According to the CCA's terms, Jet was expected to utilise Abu Dhabi as its only hub for scheduled
routes to and from Africa, North and South America, and the UAE, and there were to be some O&D
where Jet could not code share with other airlines. It was suggested that such code share restrictions
might result in market foreclosure and encourage abuse of dominance on certain routes in the
absence of other viable rivals. However, as all of these routes had respectable competition from
notable aviation businesses, which would have limited Jet-market Etihad's dominance, the
competitiveness issue resulting from the concentration of market share was avoided.

Decision as per Majority Ruling:

According to CCI, airline alliances improve and extend services, resulting in more competition in that
market. Additionally, it made the assumption that the planned combination may open the door for
other stakeholders to make similar mergers, increasing competition in the industry. Given that Jet
has been experiencing financial difficulties, CCI also took into account the planned equity infusion's
significance. This combination would enable Jet to maintain its competitive edge in the key markets
in both India and beyond.

The proposed combination was therefore approved with the caveat that the approval is based on
the information/details as provided by the parties and that in case of any modifications later on,
fresh approval should be sought. Based on the foregoing reasoning and observations, CCI concluded
that the proposed combination is not likely to have AAEC in India. Additionally, it was the
responsibility of the parties to make sure that this ex-ante permission would not result in an ex-post
breach of the Act's provisions.

Decision as per Minority Ruling:

The minority decision in the case, which held that AAEC would exist in the market for international
air passenger transportation, was founded on the following considerations:

1. The implementation of frequent flyer participation (FFP) policies would constrain consumers and
is likely to result in the creation of entry/expansion barriers, making it challenging for rivals and new
entrants to attract clients from the parties to their network.

2. The parties' and CCI's observation of the substitutability approach with regard to airports is based
on incorrect premises. Due to the fact that neither consumers nor airlines themselves perceive the
various airport air services in the India-UAE market as interchangeable goods.

3. While competitors have been present on all routes, it has been noted that Jet and Etihad are the
only ones still operating on the direct route between Delhi and Abu Dhabi. The proposed
combination will end competition between Jet and Etihad because they will likely effectively operate
as one airline as a result of the proposed combination.

4. In addition, airlines that offer one-stop services should only be viewed as distant rivals that do not
currently or in the near future pose a serious threat to the parties' ability to compete.

Therefore, it was determined by minority order that inquiry was required since the proposed merger
is anticipated to have a significant negative impact on competition in the market for international
aviation passenger transportation to and from India.

Analysis of the Order:

As previously indicated, CCI considered the combination agreement between two airlines for the
first time in this instance. The main justification for CCI's judgement is that there has been enough
competition in the pertinent market, making it unlikely that there would be AAEC there. The ruling in
the British Airways and Iberia merger, wherein the European Commission found that the stated
combination will not harm competition until there are credible and effective rivals in the relevant
market, is considered to have served as inspiration for this strategy.

Reiterating the notion that no inquiry is necessary where the information at hand is adequate to
generate a judgement for the purpose of determining the issue in a combination case The dissenting
decision, however, argued that more research was required before approving the suggested
combination. It should be noted that the ruling has been explicit that the parties would seek new
permission if any erroneous information or changes are made to the proposed combination.

Having said so, after its judgement, CCI fined Etihad Rs. 1 crore under section 43 of the Act for
finalising portions of the acquisition without receiving its consent. In February of this year, Etihad
paid $70 million for Jet Airways' three Heathrow airport slots and leased them back to the Indian
carrier in anticipation of the merger. The two parties agreed into an arrangement that was kept a
secret from CCI even while the subject was still up for approval. The aforementioned fine, however,
will not affect CCI's prior approval of the Jet-Etihad agreement. A claim against the CCI's clearance of
the aforementioned agreement has been allowed by the Competition Appellate Tribunal.