Jet-Etihad Combination: CCI views and a Comparative
analysis in relation to other major Airlines Market
Competition Law
Submitted by:
Aditya Singh
Division: ‘A’
PRN - 14010224005
[Link].
2014- 2019
Of
Symbiosis Law School, NOIDA
Symbiosis International University, PUNE
In
September, 2017
Under the guidance of :
Prof. Avinash Amarnath
Symbiosis Law School, Noida
Symbiosis International University, Pune
ACKNOWLEDGEMENT
I would like to express our gratitude to Prof. Avinash Amarnath for the immense help and
support during the making of this research project. Our deepest thanks to Symbiosis Law School, NOIDA
for having created an environment in which we could study and make our project, also for providing us with the best
of Library and the Computer Lab facilities.
We thank and appreciate our course in charge Prof. Avinash Amarnath for guiding us through the project and
for having taken the pain to go through it with attention and care and making necessary corrections as and where
needed.
Aditya Singh
Certificate
The project entitled “The most important debates in International Law” submitted to the
Symbiosis Law School, NOIDA for Competition Law as part of Internal assessment is based on
my original work carried out under the guidance of Mr. Avinash Amarnath from July to
September. The research work has not been submitted elsewhere for award of any degree. The
material borrowed from other sources and incorporated in the project has been duly
acknowledged. I understand that I myself could be held responsible and accountable for
plagiarism, if any, detected later on.
Signature of the candidate
Date: 4th September, 2017
November 20, 2013 was a historic day for the Indian aviation industry after Jet Airways (India)
Limited and Etihad Airways PJSC concluded the much talked about US$ 379 million investment
by Etihad to acquire a 24% stake in Jet.1 In addition to the equity investment, Etihad has also
agreed to infuse US$ 150 million into Jet Privilege, the frequent flyer program of Jet, to be
managed by its subsidiary, Jet Privilege Private Limited and also provide or arrange for a loan of
US$ 150 million to Jet. Earlier this year, Etihad had purchased 3 slots owned by Jet at the
Heathrow airport in London for US$ 70 million.
The saga of the Jet-Etihad deal has been in rumors since August 2012, a month prior to the
liberalization of the aviation industry to foreign investment by foreign airlines. According to
sources, the first step towards what culminated into the first investment by a foreign airline into
an Indian airline was taken in July 2012, when Naresh Goyal, the chairman of Jet Airways
Limited brought up the idea with James Hogan, the Chief Executive Officer of Etihad Airways
PJSC2. Considering it beneficial to the economy, Mr. Goyal said “the infusion of foreign direct
investment in the Indian aviation sector will result in economies of scale, grow traffic at Indian
airports, and create job opportunities. It will greatly benefit all our stakeholders whilst
significantly benefitting our guests who will now have access to a more expanded global
network, enhancing connectivity for tourists, business travelers, Indian families and the wider
travelling public”.3
The Deal has been the most talked about deal of the year 2013 for the various issues faced in its
consummation, including various issues raised by the regulators around the ‘control’ of Jet post
the Deal. The Deal continued to be surrounded by controversies with allegations against the
government for changing the policies to facilitate the Deal. Time will tell whether Etihad’s entry
as a co-pilot will ensure safe landing for Jet in future.
1
[Link]
2
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3
Supra. note 1 [Link]
A. Purchaser
Etihad is the national airline of the United Arab Emirates. It is a public joint stock company set
up in July 2003 by the Royal (Amiri) Decree, and commenced its commercial operations in
November 20034. Etihad is primarily engaged in the business of international air transport of
passengers. Additionally, Etihad is also engaged in maintenance and repair services, ground
handling services, cargo transportation and travel management services, with Etihad Cargo and
Etihad Holidays being its two main divisions.
B. Issuer
Jet is a public limited company registered under the Indian Companies Act, 1956. After initially
setting up Jetair (Private) Limited, Mr. Naresh Goyal (“NG”), the non-resident Indian (“NRI”)
promoter of Jet, diversified his business activities in 1991 taking advantage of the opening of the
Indian economy and enunciation of the Open Skies policies by the Government of India to set up
Jet Airways for the operation of scheduled air services on domestic sectors in India. It was
incorporated as a private limited company on April 1, 1992, and commenced operations from
May 5, 1993.5 Gradually, it expanded to various international destinations as well, making it one
of the finest airlines in the world. It was on 28 December, 2004 that the company became a
public limited company. Jet is listed both on the National Stock Exchange of India Limited
(“NSE”) and the Bombay Stock Exchange Limited (“BSE”). Jet also has 3 wholly owned
subsidiaries,
i. Jet Lite (India) Limited – a domestic airline providing low cost services to customers;
ii. Jet Privilege Private Limited – as part of its alliance with Jet, Etihad has agreed to buy a
majority stake in this company; and
iii. Jet Airways Training Academy Private Limited.6
4
[Link]
5
[Link]
6
[Link]
The Transaction required the approval of a number of regulators, including the Cabinet
Committee on Economic Affairs (“CCEA”), Foreign Investment Promotion Board (“FIPB”), the
Competition Commission of India (“CCI”) and SEBI.
PARTICULARS OF THE DEAL
Subscription 27,263,372 equity shares of the Target with face value of INR 10 each
Shares
Etihad’s stake in 24%
Jet post issuance
Allotment price INR 754.7361607 (Rupees Seven Hundred And Fifty Four Point Seven
Three Six One Six Zero Seven Only). The shares were issued to Etihad at
a premium of 32%.
Total INR 20,576,652,711.02 (Indian Rupees Twenty Billion Five Hundred And
consideration Seventy Six Million Six Hundred And Fifty Two Thousand Seven
Hundred And Eleven Rupees And Two Paise).
Other aspects of Along with the subscription to the equity shares of Jet, Etihad has also
the deal made or agreed to make the following investments in Jet:
￭ US$ 70 million was invested by Etihad to purchase 3 landing and
departure slots owned by Jet at Heathrow Airport in February 2013. 7
These slots were acquired by Etihad by way of a sale and lease back
arrangement.
￭ An amount of US$ 150 million will be invested by Etihad into Jet’s
frequent flyer program, ‘Jet Privilege’.
￭ In addition to the above, Etihad has also agreed to extend low interest
loans of US$ 150 million, to retire the high interest debt on the books of
Jet.8
Chronology of Events
Date Particulars
7
[Link]
8
[Link]
airways-group
January 3, Jet informed BSE about talks with Etihad.9
2013
February, 2013 Etihad chief executive James Hogan and Jet Airways’ chairman
Naresh Goyal led a joint delegation of both the airlines and separately
met Finance Minister P. Chidambaram, Civil Aviation Minister Ajit
Singh and Commerce Minister Anand Sharma to apprise them about a
possible stake sale deal.10
February 27, Announcement of Etihad buying Jet’s landing and departure slots at
2013 Heathrow in a sale and lease back agreement signed on February 26,
2013.11
April 24, 2013 Board of Jet approves the issuance of 27,263,372 equity shares by way
of preferential allotment to Etihad.
￭ Jet and Etihad along with the Promoters execute the IA, SHA and
the CCA.
May 24, 2013 Preferential allotment to Etihad is approved by the shareholders of Jet.
June 14, 2013 FIPB defers the decision on Etihad’s investment into Jet.12
July 29,2013 FIPB grants conditional approval to Etihad to acquire stake in Jet.13
September 16, BJP leader Subramanian Swamy challenges the Deal in Supreme
2013 Court of India
October 1, SEBI clears the Deal and clarifies that open offer obligations are not
2013 triggered by the investment.14
October 3, The Cabinet Committee of Economic Affairs approves the Deal
2013
November 12, The Deal is approved by Competition Commission of India
2013
November 20, Jet issues the Subscription Shares to Etihad.
2013 ￭ James Hogan, CEO of Etihad and James Rigney, CFO of Etihad are
appointed as additional directors of the Target.
￭ Board of Jet approves transfer of ‘Jet Privilege’ programme to its
subsidiary Jet Privilege Private Limited as a slump sale.
December 19, Competition Appellate Tribunal admitted an appeal against the CCI
2013 order. Also imposes a fine of Rs. 10 million on Etihad for non-
disclosure of certain information about the purchase of slots at
Heathrow, London.15
9
[Link]
10
[Link]
chidambaram/[Link].
11
[Link]
slots-for-70-m/[Link].
12
[Link]
13
[Link]
14
[Link]
cooperation-agreement-jet-airways.
15
[Link]
crore-fine-on-etihad-in-jet-airways-deal/
May 8, 2013 SEBI finally cleared the Deal holding that no open offer shall be
required under the Takeover Code.
.
APPROVALS
The FIPB was to consider approving the
FOREIGN INVESTMENT
Transaction in its meeting on June 14,
PROMOTION BOARD (FIPB)
2013.2However, the decision was deferred by
FIPB stating that more clarity was required
with respect to Etihad’s rights under the
Transaction Documents. Subsequently, the
Transaction was approved by FIPB in its July
29, 2013 meeting. The approval was
conditional requiring certain conditions as
mentioned therein to be satisfied.
SECURITIES AND EXCHANGE SEBI had approved the Transaction on October
BOARD OF INDIA (SEBI) 1, 2013 stating that the Transaction would not
trigger open offer obligations under the SEBI
(Substantial Acquisition of Shares and
Takeovers Regulations), 2011 (“Takeover
Code”). However, SEBI did not comment on
the CCA, and had specifically stated that it
would be guided by the decision of the other
regulators in this regard.
CABINET COMMITTEE ON On October 3, 2013, the CCEA approved the
ECONOMIC AFFAIRS (CCEA) Transaction.
COMPETITION COMMISSION OF The CCI approval (“CCI Order”) for the
INDIA (CCI) Transaction was received on November 12,
2013.
CCI Approval
On November 12, 2013, the CCI approved the Deal removing the last hurdle and paving the way
for the first investment by a foreign airline in to an Indian airline. 16 The issue that arose before
the CCI was whether the Deal will cause an appreciable adverse effect on competition
(“AAEC”) in India under Section 3 of the Competition Act. CCI with a 2:1 majority approved
the combination, which crosses the threshold limit under Section 5 of the Competition Act, the
CCI has inter alia considered the impact of the alliance on the competition in the India-Abu
Dhabi route and on the Indian aviation sector.
Relevant Market
As Etihad does not provide services for transportation of passengers within India, CCI held
international air passenger transportation from and to India to be the relevant market for the
combination.
Determination of AAEC
In order to assess the impact of the transaction on competition in India, the CCI determined the
relevant market for passenger air transport services based of point of origin or point of
destination (“O&D”) pair approach on a non-directional basis. Basing its analysis on the O&D
pairs, it also factored in the duration of the flight, connecting time, schedule, price and time-
sensitivity of the consumers, and availability of alternate routes to the consumers. Following
were the important factors considered by CCI in approving the deal:
A. Market Share
16
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%[Link]
The CCI noted that Jet has about 20% market share in the India-UAE sector and Etihad about
5%. On the combination, these two airlines will stop competing with each other and would be
able to provide better services. Further it pointed out that there are 38 routes to/from India to
other destinations where Etihad and Jet fly and there is at least one competitor on each route. Of
all these routes, Jet and Etihad have a combined market share of 50% in only 7 of these routes
and of these 7, on 3 routes either Jet or Etihad have a market share of less than 5%. Thus post
transaction the market share would only be marginal and not affect competition and on analyzing
several routes the CCI concluded that on all routes there are other players which ensure that
consumers can make choice between airlines.
B. Network Effects
CCI in its order emphasized that the O&D approachis itself not sufficient for assessing the
competition so due consideration has to be given to the network effects of the competition which
includes competition between airline hubs. In addition to studying the market share between
cities in India to the hub, CCI also analysed the competition in the onward bound traffic and
systems. In this case, a linked hub-and spoke airlines network form an integrated system of
complementary routes which increases efficiency. It clarified that high market share would not
indicate absence of competition as competition would still be present from alternative networks
and alliances/systems, especially for the west-bound traffic to North and South America.
C. Abu Dhabi as the Exclusive Hub
One of the main conditions in the Transaction Documents require Jet to use only Abu Dhabi as
an exclusive hub for services to and from Africa, North & South America and UAE and restricts
Jet to code share with other airlines in certain O&D pairs. Jet will have to cancel its code share
with other airlines and flow its traffic through Abu Dhabi. But since there is stiff competition
from other players on these routes, CCI was not concerned with these code share agreements
leading to abuse of dominance. The combined market share of Jet and Etihad on a majority of
these O&D pairs is less than 30%.
Further since this relationship between Jet and Etihad results in more choices to the Indian
consumer as the Jet flights from multiple points in India operate to Abu Dhabi and then continue
to other places in Middle East and North and South America which thus allows more
connectivity as they create a whole new host of city pairs.
Also Abu Dhabi’s proximity to India will allow for deployment of smaller and narrower body
aircraft in which larger wide body aircraft would have been unviable. So Jet would be able to
sustain larger traffic on the routes from Delhi and Mumbai to North America which would
increase capacity and choice available to the Indian consumers.
iii. Rectification of Order
Subsequent to the CCI order, the parties made a request to CCI to clarify that the proposed
investment by Etihad into Jet is purely strategic investment and Etihad will not acquire any
control over Jet. However the CCI did not rectify the order and clarified that the investment
amounts to joint control.17
ISSUE BEFORE CCI
The only issue before CCI was whether the Proposed Combination was likely to cause AAEC in
India. Although CCI approved the Proposed Combination by its majority view, a single member
issued a separate dissenting opinion which has also been considered below.
MAJORITY RULING
Notice under section 6(2) of the Act on the Proposed Combination was given to CCI on May 1,
2013. Subsequently, the Parties sought time to furnish additional information since the
Transaction Documents were amended. The final set of information was submitted by the Parties
in October and the Ruling was pronounced on November 12, 2013. Based on a review of the
information that was submitted by the Parties, the Majority Ruling approved the Proposed
Combination and made the following observations on the Proposed Combination:
Relevant Market
1. To examine the impact of the Proposed Combination, CCI first ascertained the relevant
market. CCI concluded that the relevant market for passenger air transport services was
normally defined on the basis of a point of origin and point of destination (“O&D”) pair
17
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approach4 on a non-directional basis5(demand based approach). Thus, each O&D pair
constituted a separate market from the consumers’ perspective. It was possible that two
airports would be seen as part of the same market and in certain cases an O&D pair was
substitutable.
2. CCI also reasoned that consumers might consider direct flights and indirect flights as
substitutable. CCI noted that several factors determined substitutability of direct and indirect
flights and that it was possible that indirect flights offered by competitors could be considered
as an alternative for passengers.
3. CCI also noted that in the demand based approach it was important to identify different classes
of passengers and noted that different services would be substitutable for different class of
passengers. CCI noted that there were time sensitive passengers and price sensitive passengers
and it would be important to examine the impact of the Proposed Combination in respect of
services to both class of passengers.
4. CCI concluded that for an assessment of the Proposed Combination the effect of the Proposed
Combination on the service offered by both the Parties would have to be ascertained.
5. Based on these factors and also noting that Etihad was not providing services in the domestic
sector, CCI concluded that the relevant market was the international air passengers market:
on the O&D pairs originating from and ending in 9 cities in India (Kochi, Bombay,
Thiruvananthapuram, Bangalore, Kozhikode, Ahmedabad, Delhi, Hyderabad and
Chennai) to/from United Arab Emirates;
on the O&D pairs originating from or ending in India to/from international destinations
on the overlapping routes of the Parties to the combination.
In arriving at this conclusion, CCI made a distinction between different groups of passengers and
observed that Indian passengers on the 9 direct overlapping O&D pairs were generally price
sensitive and less time sensitive. Further, it was observed that the passengers living in the
catchment areas of two or more airports would consider those airports as possible substitutes. For
instance, in UAE, airports at Abu Dhabi, Dubai and Sharjah could be considered as substitutable
with each other for the reason that these airports were within 2 hours distance from each other.
Comparison with foreign rules
In this case, CCI was examining a merger or arrangement in the context of airlines for the first
time. Although CCI did not quote any international pronouncements in the Ruling, the approach
of CCI was similar to the approach followed by the European Commission in making a
competition assessment in the context of mergers and operational arrangements between airlines
in Europe. For instance, in the merger between British Airways and Iberia, the European
Commission concluded that the merger would not affect competition and the merged entity
would continue to face competition from other entities. 6 In the case of merger between
Northwest Airlines and Delta Airlines, the European Commission allowed the merger and noted
that both airlines had benefit of complementarity in their resources. 7 In the case of acquisition of
Martinair by KLM the European Commission directed investigation and approved the same
thereafter. Interestingly, in the case of the takeover of SN Brussels Airlines by Lufthansa 9 after
the European Commission highlighted apprehensions, Lufthansa made several commitments and
concessions. After examining these concessions and commitments, the European Commission
approved the acquisition subject to Lufthansa complying with the conditions.10
While the Majority Ruling was clearly satisfied with the material available to form an opinion
for the purpose of section 31(1) of the Act, the Dissenting Opinion has reached the conclusion
that an investigation ought to have been ordered under the Act. However, the rulings of the
European Commission highlighted above reveals that if a party is granted an opportunity,
apprehensions of the regulator can be allayed. As the Majority Ruling itself has noted, some
information for purpose of competition assessment will be available only after the Proposed
Combination comes into effect.
The approach of CCI provides clarity regarding the steps to be followed to analyse whether a
combination is likely to cause AAEC and this analysis would help companies identify whether a
proposed transaction would be permissible or not under the Act. The reasoning and conclusions
of the Majority Ruling were grounded in uncontroverted facts and this is an extremely important
aspect as it clearly places the onus on parties to substantiate their claims before CCI.
This pragmatic and balanced approach augurs well for companies that intend to enter into
combinations either at the vertical or horizontal level and whether at the domestic or
international level.
It is important to note that the issue of foreign investment in India is regulated primarily by the
regulations under the foreign exchange laws (“FEMA”). As a listed company, Jet is also
required to comply with various regulations issued by SEBI apart from compliance with
requirements under the Companies Act, 1956 (“Companies Act”) and possibly the Income Tax
Act, 1961 (“IT Act”). The Ruling of CCI only approves the Proposed Combination from the
perspective of competition in the market. Although the issue relating to conflicting jurisdictions
by different regulators has not been addressed by the Supreme Court of India, the approval of
one regulator is not binding and not an indication of compliance for the purpose of another
regulator.
Conclusion
Based on the analysis above, CCI concluded that the Proposed Combination was not likely to
have an AAEC and consequently approved the Proposed Combination. In contrast, the
Dissenting Opinion has concluded that it was not possible to independently verify the details
submitted by the Parties and consequently, the impact of the Proposed Combination could not be
satisfactorily examined. Further, the negative impact of Jet exiting its code share agreements on
competition could not be discounted. The Dissenting Opinion also notes that the O&D pairs
examined might not justify complete substitutability and consequentially the conclusion of the
Majority Ruling that there would be no impact on competition might not be accurate. In view of
the same, the Dissenting Opinion concludes that possibility of AAEC cannot be ruled out.
