Benchmark prices to counter emerging duopoly in Indian aviation

Recent developments in the Indian aviation sector are cause for concern, as the industry has virtually turned into a duopoly market. IndiGo and Air India have proven to be established players, while newer airlines have all but exited the aviation market owing to predatory pricing of flight tickets. The emerging duopoly market between IndiGo and Air India has meant the highest surge in airfare, which is a concern for air travellers. The sharp increase in post-Covid prices has remained unaddressed by the government to cover the losses of airlines. As a result, these two airlines have made a fortune and together command a 70.8 per cent share of the Indian aviation market. The emergence of this duopoly market and escalating prices raise questions about the mandate of the Competition Commission of India, which must ensure the broadest range of goods and services at competitive prices.

The basic idea of competition in the market is to benefit consumers. However, the Indian aviation industry is swiftly turning from monopolistic to oligopolist and now to duopoly, especially after the Covid-19 pandemic. Under such conditions, airlines leverage the competitive pricing mechanism to gain greater control over ticket prices. This market strategy ultimately hampers competition and drives away potential newcomers. Such practices amount to “predatory pricing,” which constitutes an abuse of a dominant market position as defined in the Competition Act of 2002.

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Furthermore, while the aviation industry faced significant challenges during the pandemic, IndiGo appeared to weather the storm better than its counterparts and is now bouncing back stronger. It is important to foster the growth of private enterprises, but it is equally crucial to provide safety nets for new players in the market, protecting them from potential downturns and promoting fair competition. Considering these concerns, it is essential to examine the potential consequences of the convergence between Air India and IndiGo as dominant players in a duopolistic structure, both on consumer welfare and the Indian aviation industry.

The recent train accident in Odisha has underscored the issue of predatory pricing, particularly considering the subsequent exorbitant increase in flight fares that exploited the surge in demand. Further, the exorbitant train tickets for the Vande Bharat Express have also pushed travellers towards air travel. The extended period of deregulation and privatised pricing has significantly eroded consumer surpluses without any established benchmarks for pricing between destinations.

In a country as diverse and complex as India, the market consists of three full-service airlines (Air India, Jet Airways, and Vistara), along with four low-cost carriers (IndiGo, SpiceJet, GoAir, and AirAsia), and four regional players (Air India Regional, Air Costa, Air Carnival, and TruJet). However, the practice of full-service airlines offering substantial discounts to attract customers has led to reduced competition and an unjustifiable surge in air ticket prices during periods of low demand.

Under the guise of a free market, certain players have been exploiting the system by charging prices that either deplete consumer surplus or hinder the entry of new players who could foster fairer pricing through healthy competition. To address this concern, the Ministry of Aviation introduced price caps, stipulating that airlines could not charge passengers less than Rs 2,900 (excluding GST) or more than Rs 8,800 (excluding GST) for domestic flights lasting less than 40 minutes. These lower caps aimed to protect financially weaker airlines, while the upper caps aimed to safeguard passengers from exorbitant fares. However, indications of violations and non-compliance with these caps have emerged. Recognising these issues, while the Parliamentary Standing Committee on Transport, Tourism, and Culture previously underscored the role of the Ministry of Aviation, the role of the CCI has been largely overlooked in this context.

The Indian aviation sector requires strategic policy interventions to address the concerns surrounding market dominance, consumer welfare, and competition. Firstly, the CCI and the Ministry of Aviation must have a greater role in regulating the sector. Proactive monitoring and enforcement of competition regulations are needed to ensure a level playing field.

Secondly, regulations should be introduced to encourage more private players and discourage market concentration. A diverse and competitive market structure will foster innovation, improve service quality, and offer fair pricing options.

Thirdly, the government should actively benchmark prices and enforce adherence to recommended price caps for domestic flights. Stricter regulation is necessary to prevent fare manipulation and ensure reasonable fares for consumers. Fourthly, prioritise consumer welfare by promoting flights for all through reasonable and trusted pricing. Lastly, promote healthy competition to prevent the emergence of entities that are “too big to fail.”

Implementing these policy suggestions will help strike a better balance between market dynamics, consumer welfare, and competition. Collaboration between the government, regulatory authorities, and industry stakeholders is vital for realising these policy changes and creating a vibrant and inclusive aviation industry that benefits both consumers and the overall economy. When the free market or invisible hand fails, it is the duty of the government to ensure equilibrium in prices for a level playing field for the industry and to protect the interests of consumers.

(Mishra is a junior research fellow, and Krishna Raj is professor at Institute for Social and Economic Change, Bengaluru)