Clearing the Runway for Crisis Cartels: Legalising Insolvency-Driven Collusions in the Indian Civil Aviation Industry

Ananya Arun*

“We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.”[1]

-       Adam Smith (1723–90)

Introduction

Distressed companies exhibit a dramatically different behaviour from that of others in the competition sandbox. Given the race against both time and the market, there is ample room for predatory or cooperative practices such as acts of fire sales, predatory pricing, and the most relevant to our discussion, collusive tactics. Such companies, on the brink of insolvency, resort to mergers or similar combinations as a part of their restructuring process. Distressed firms often resort to being acquired by stronger companies or joining hands with other firms to avoid insolvency. The debt-ridden Air India, for example, was acquired by the Tata Group in an attempt to keep the carrier in business. Restructuring entails dismantling such companies in distress, partially or fully, to deal with the impending insolvency. Against this background of the intersection of insolvency law and the competition regime, we now delve into an industry-specific analysis of this intersection – the Indian civil aviation industry.

With a whopping size of $136 billion, the civil aviation industry of India stands as one of the world’s largest aviation markets, demonstrating commendable growth over the past nine years. It is, however, plagued with issues of debt burden, internal mismanagement, high fuel costs, staff shortage, and lastly, rising insolvency. With the effects of the pandemic soaring to the skies, over seventeen airlines have gone out of business, with IndiGo being the only profitable airline in India.

The aviation market is dominated by a few players; it is limited in nature. Given the increased tendency of an oligopolistic market to attract collusions between major players, the role of the Competition Commission of India (“CCI”) becomes highlighted in controlling such collusions. However, the precarious landscape in the aviation industry necessitates a coordinated effort amongst businesses in the industry, some of which may also include ‘cartelistic behaviour’. These ‘collusions’ amongst industry players serve as a survival tactic to avoid insolvency, but clash with the traditional antitrust aversion to cartels, bringing us to the topic of focus.

Crisis Cartels – A Controversial Lifeline?

Cartelisation has been universally frowned upon, owing to its highly anti-competitive attributes. To briefly elucidate, cartels may be described as a ‘tactic’ where market players come together to divide up the market among themselves, or engage in collusion to collectively control prices. The concept of crisis cartels deviates from the universal categorisation of cartels as negative. These are private industrial restructuring agreements that seek to remedy issues of ‘overcapacity’, which is specifically one of the many economic issues haunting the airline industry. There have been many calls for legalising such crisis cartels in India, but there has been no active legislative effort or intent to carry forward the same, so far.

Crisis cartels, when carefully regulated, could aid in preventing the disorderly exit of airlines, offering a way out for a distressed airline moving toward insolvency. Such “collusion”, though impactful on competition, would greatly aid in stabilising ticket prices and avoiding destructive competition during low-demand fluctuations. In the case of United States v. Civil Aeronautics Board, there was one such instance of a cartel-like beneficial collusion being formed owing to a severe shortage in aircraft fuel. Three airline corporations came together to enter an agreement regarding the number of flights and their scheduling, to save on financial costs and avoid insolvency. Untimely (and often harmful to competition) exits owing to insolvency pose great hurdles to industries that are already suffering. The exit of airlines from the industry makes the already oligopolistic market a smaller playing field, reducing the elements required for a healthy competitive landscape and paving the way for monopolies.

Instances like this showcase the benefits of such arrangements (including exceptional cartelistic behaviour) to healthy competition in the aviation industry. These arrangements are proposed as either mergers/acquisitions under the Companies Act or by way of resolution plans made under the aegis of the Insolvency and Bankruptcy Code (“IBC”),  by the distressed firm.  The CCI is equipped with the power to approve any such mergers, acquisitions or amalgamations and reviews proposed combinations for any drastic negative impact on the competitive landscape in India. The CCI assesses airline mergers or acquisitions proposed under the resolution process. As a part of such merger control, the CCI investigates and blocks mergers and acquisitions that are recognised to be cartelistic.

Crisis cartels, failing firm defence and the ambiguity in Indian law

With the CCI frowning upon all cartelistic collaborations, such resolution plans proposing crisis cartels or similar restructuring agreements would not see the light of day. To add to this legislative blur, the legal acknowledgement and recognition of the concept of “failing firm defence” is unclear in the Indian legal landscape. This defence allows firms to merge if it is shown that in the absence of such a merger, the firm would have to exit the market. This exit must have more, if not equally adverse, effects on competition than the proposed merger.

All of the aforementioned combined leave little scope for distressed airlines to form helpful arrangements to make a lifeline for their sinking ships (or aircraft). In light of the above, there is an increasing need for the CCI to change its outlook towards such arrangements. The hesitation of the CCI to green-signal crisis cartels is, however, warranted. Affirmation of such cartels would entail going against the age-old policy of strict enforcement of antitrust laws, striving to completely wipe out cartels. But with a mosaic of policy lessons from jurisdictions that acknowledge such agreements, this stance can be shifted.

There are two broad categories of policies that countries usually adopt when dealing with cartelistic behaviour.  The ‘per se’ prohibition approach categorises all cartelistic behaviour as illegal per se. The ‘control-of-abuse’ policy is a more lenient approach that allows for cartelistic behaviour to a certain necessary extent, but with sufficient oversight keeping a check for potential harm. The aviation industry in India requires a nuanced ‘control-of-abuse’ outlook to be adopted by the CCI while reviewing the resolution plans proposed (“plans”). This approach could aid in furtherance of the core purpose of the IBC, which is to ensure that the distressed company remains a going concern.

The CCI, during merger control, must not just look into the effects of the proposed arrangement on competition, but also assess what would happen if such an arrangement weren’t formed.

Regulating crisis cartels – Conditional exemptions and oversight

This change in CCI’s outlook requires, firstly, a legal acknowledgement of crisis cartels. This legalisation must be done with an industry-specific approach, rather than a blanket legalisation. Such a move would ensure that crisis cartels are not resorted to as a matter of ordinary course by all the industries, thereby preventing misuse. Secondly, there is a need to bring in legislative clarity on the admissibility of the failing firm defence.  The lack of statutory and legislative guidance with respect to this defence can be remedied through an amendment of the Competition Act (“Act”) to codify clear criteria to invoke the defence. Particularly, Section 5 or Section 29 of the Act could be amended, by way of insertion of a proviso, that recognises the failing firm defence. The proviso would add the failing firm defence as a factor to be considered by the CCI while evaluating the combinations that exceed the threshold specified under Section 5. The proviso, however, must be strictly conditional to prevent abuse. It would be applicable only to airlines that are insolvency-bound. The defence is to be invoked only when the combination is more preservative of competition rather than the firm’s exit. The CCI must be empowered to evaluate and green-signal the usage of the failing firm defence on a case-by-case basis. It is to be noted that the proviso would not imply that combinations proposed by airlines bound for insolvency are exempted from being notified to the CCI. It would only provide that the “failing firm defence” can be invoked by the distressed airlines, for the CCI to consider combinations that might otherwise be rejected.

Lastly, the CCI must harmonise efforts with the Directorate General of Civil Aviation (“DGCA”), which is the authority dealing with the ex-ante regulation and oversight of the aviation industry. With the cooperation of the DGCA, the regulation of crisis cartels can be an achievable feat.

In the US and EU jurisdictions, despite the strict assessment of crisis cartels, courts have time and again taken a lenient approach, reducing the fines on cartelists in distressed industries. The European Regime offers lessons in the regulation of crisis cartels. The European Commission makes the decision to allow certain combination agreements by analysing whether the industry is going through a cyclical over-capacity or a structural overcapacity. To put it simply, cyclical over-capacity occurs normally in the ordinary business of the market, often remedied by time itself. But structural over-capacity exists over a prolonged period, requiring intervention to fix it. Only in cases of industries experiencing a structural over-capacity should the commission permit such cartels. The independent competition authority in Germany, the Bundeskartellamt, has also considered and acknowledged (with caution) such arrangements during times of economic crisis. These approaches must be reflected in the Indian legal landscape.

With respect to cartel formation, the CCI must ensure that the objectives of such restructuring agreements are solely aimed at capacity reduction. Once exemptions are granted, regular check-ins regarding compliance with the Act, as well as timely assessments regarding the economic impact and efficiency of such ‘crisis-cartels’ on the aviation industry, must be done. Such a review may be done by imposing sunset clauses with interim reviews as well. Time limits may be set on the arrangements to ensure that the cartel/merger does not move from being a remedy to being a weapon, leading to actual antitrust violations. These crisis cartels must be allowed to operate only for a finite, limited period of time, and only if other, more economically viable options are not available to the distressed firm to sustain itself. A high threshold must be set to determine if the merger or other arrangement would prove to be more helpful in maintaining the competitive spirit than the exit of the firm. The exemptions must be proved to be the least restrictive and least detrimental to competition as achievable.

Certain provisions of the Act itself may be relevant here. Sections 19(3)(d) to (f) address benefits that outweigh the possible anti-competitive effects an agreement may cause. These sections may also aid in bringing legality to such agreements. Benefits include benefits to customers, improvements in the production or distribution of services, etc. Code-sharing agreements and collaboration in flight frequencies often result in efficiency and increased quality in the services, in turn benefiting the customers.

Lastly, yet importantly, the CCI is not concerned with ensuring that the distressed airline stays in business, but merely with the competitive effects of the airline leaving or staying in the market.  Therefore, crisis cartels and other arrangements must not be used as a means to resolve insolvency. Instead, they may be allowed on an exceptional basis, based on the sustainability of their impacts on competition. A complete abandonment of antitrust scrutiny is not advocated herein. There is a need for strict oversight and regulation on the part of the CCI, both during the review of plans as well as post-approval.

Conclusion

Structural overcapacity is one of the most severe economic issues plaguing the Indian civil aviation industry. Therefore, the need of the hour is for the CCI to validate such arrangements, recognise failing firm defences, and legalise crisis cartels on a case-by-case basis. The CCI must take nuanced approaches most suitable for a particular industry, rather than blanket rejections or biases. The Indian aviation industry’s crisis demands a very specific solution. While validating crisis cartels might be a contentious remedy, the careful regulation and implementation of the same could help prevent the domino effect of irregular airline exits on the competition in the industry.

*The author is a Fifth-year B.A., LL.B. (Hons.) student at the National University of Advanced Legal Studies, Kochi.