The Indian aviation sector, characterized by its dynamic growth and fierce competition, witnessed a landmark event in 2023 with Tata Group’s announcement of the Air India-Vistara merger. This consolidation, bringing together a flag carrier and a prominent full-service airline, promises to reshape the competitive landscape and potentially redefine India's position within the global aviation market.
The merger of Air India and Vistara marks a significant milestone in India's aviation sector, representing a complex corporate restructuring process that navigates the intricate frameworks, and sector-specific regulations in India. At the heart of this merger is the ‘composite scheme of arrangement’ approved by the National Company Law Tribunal (“NCLT”) under Sections 230 to 232 of the Companies Act, 2013 (“Companies Act”). These sections provide a comprehensive framework for Mergers and Acquisitions (“M&A”), ensuring that such corporate actions are carried out in a transparent and fair manner. Furthermore, the conditioned approval granted by the Hon’ble Competition Commission of India (“CCI”) becomes pertinent to be addressed through a critical lens.
Comprehending This Strategic Combination Through M&A Perspective
The merger process typically initiates with the preparation of a scheme of arrangement under Section 230. This section mandates the inclusion of details pertaining to the transfer of assets and liabilities, the rights of shareholders and creditors, and the arrangement's overall feasibility.
The approval process, as mandated by the Act, involved obtaining consent from shareholders and creditors of both Air India and Vistara. This requirement, stipulated under Section 230(6), ensures that those with vested interests in the companies have a say in the restructuring process. The absence of significant objections from stakeholders in the Air India-Vistara merger suggests a consensus on the perceived benefits of the consolidation. Later, it was filed under Section 231 with the NCLT which serves as the adjudicating authority.
Another aspect of the merger is the dissolution of Vistara without going through the winding-up process. Section 232 confers the NCLT with the authority to sanction the scheme once it is satisfied that the requirements of the Act have been met. This section also provides for the dissolution of a company without winding up, as was the case with Vistara in the merger. The flexibility inherent in this provision facilitates expeditious corporate restructurings while maintaining legal sanctity.
The scheme's compliance with the Companies Act is merely the starting point. Additional regulatory clearances from bodies such as the CCI and the Directorate General of Civil Aviation (“DGCA”) are necessary. These multifaceted regulatory touchpoints are designed to protect market interests and ensure sector-specific compliance. The involvement of Singapore Airlines as a stakeholder brings an international dimension to the merger, invoking aspects of cross-border merger regulations under Section 234 of the Companies Act and related rules. The NCLT order's stipulation regarding Foreign Direct Investment (“FDI”) approval and security clearances within a nine-month timeframe aligns with the government's focus on balancing foreign investment with national security concerns.
The Antitrust Perspective
Owing to the mandatory requirement of approval from all pertinent sector regulators, this transaction was referred to the CCI. After a thorough deliberation, CCI granted the approval albeit with certain stipulations. These conditions mandated that the merged entity, retaining its name as Air India, must uphold particular levels of competition in the relevant market, which included commitment not to decrease the number of flights or increase prices.
In order to understand the implications of this deal, it is imperative to understand the structured review process for merges, which is followed by the CCI in accordance with Section 5 of the Competition Act, 2002. The review process entails three stages – the Pre-notification phase, the Phase I review which is the initial stage of assessment and the Phase II review wherein if a combination is likely to cause an Appreciable Adverse Effect on Competition (“AAEC”), the parties shall be given a show cause notice to make their case within 30 days.
In the case of this merger, Phase II review was adopted by the commission. However, as stated above, the combination was approved after due consideration and certain stipulations by the commission. This raise concerns over the abuse of dominance and its possible effect in the aviation industry. Even though approval has been granted by the competition watchdog; however, in the opinion, this combination possesses the potential to impede rapid expansion and establish barriers to entry, one of the factors to cause adverse impact under Section 20(4)(b) of the act and further abuse of dominance. There are only ten established players in the domestic aviation market. Now, this merger is likely to consolidate over a whopping 20% of this industry, thereby, creating a big stake in the market.
Now, it is pertinent to note that market share is an objective factor to determine abuse of dominance and apart from this, there are several subjective factors which are also considered by the CCI in determining the same as held in the case of MCX Stock Exchange v. National Stock Exchange of India Limited. The factors such as vertical integration, countervailing buyer power, economic power of the enterprise and creating entry barriers are some factors which have to be analyzed.
In the instant case, the economic power of the two enterprises against its competitors, as provided under Section 19(4)(d) of the act have to be critically looked at. It is pertinent to note that Tata Group’s economic power can be intrinsically established from the humungous acquisitions done by the group in aviation industry viz, Air India Express and Vistara amongst others. This clearly implies that the group has an outstanding economic power, making it dominant in the industry. Hence, merging these two big entities can lead to a possible dominance.
Furthermore, in the landmark case of Hoffmann-La Roche & Co. v. Commission, it was held that the existence of lively competition in the market does not exclude the possibility of there being a dominant firm in the market. This clearly states that even though there can be a situation of competition in the market, but the possibility of there being a dominant firm does not persist away. Hence, there definitely exists a possibility of the new entity being dominant.
The aviation industry, being oligopolistic in nature is a highly capital intensive business as there are high fixed operational costs and sunk costs. This stake is likely to restrict in creation of barriers to market entry, breaching the first factor entailed in Section 19(3)(a) of the Act, leading to adverse effect in the market.
In furtherance to this, the stability of any airline can be impacted by a variety of external factors, and the aviation industry is especially vulnerable to these. In the past, there have been numerous instances where airlines have declared insolvency and exited the industry. Very recently, GoFirst airlines suffered insolvency, thereby reducing existing competitors in the domestic aviation industry. This can also be a pertinent reason causing depletion in the level of concentration, as entailed under Section 20(4)(c) which is likely to cause an adverse impact.
Implication Caused by The Merger Till Date
From the time this merger has taken place, the Vistara airline has been losing its employees, on-ground and office staff. This is particularly because the entire crew of 6,500 personnel is to be absorbed by Air India airlines post the merger. However, it is extremely improbable to absorb the entire staff due to the logistical reasons as Air India has been on a hiring spree in the 2023-24 season, adding over 6,000 workforce alone. Some industry experts in this regard highlight that the airline has already lost some of the best talent, and if this is not curtailed it will continue to lose some potential workforce out there.
The merger of Air India and Vistara raises significant concerns among stakeholders, notably loyal Vistara flyers who fear a decline in service quality. This anxiety is exacerbated by the observation that Vistara's service levels have already shown signs of deteriorating since the merger announcement, potentially due to Air India’s lesser service standards. The homogenization of service standards threatens to alienate Vistara's premium clientele, who value reliability and quality over cost. Consequently, the merger might lead to a brand dilution rather than the desired synergetic enhancement of service quality.
Furthermore, there has also been an ongoing tussle between pilots and the management of Vistara airlines and as a result of this, several A320 pilots have left the airline. Now, this is concerning for both the merged entities. Although, in a statement given by Vistara, it confirmed the fresh contracts being accepted by all the employees; however, the ground reality is different from what is being portrayed in the public domain.
Concluding Remarks And The Way Forward
The proposed merger between Air India and Vistara presents a complex and multifaceted challenge, requiring a harmony between achieving business synergies and maintaining competitive fairness. Critical to the success of this merger will be the strategic integration of both airlines' strengths while safeguarding consumer interests and maintaining high service standards.
Proactive measures, such as retaining Vistara's service ethos and addressing concerns from loyal customers, can help mitigate negative impacts. With careful planning and execution, the merger could ultimately enhance the competitive landscape, offering improved services and benefits to a broader customer base, and setting a precedent for future consolidations in the aviation industry. Although the skies are not clear as of now, only time will decide how things will unfold in the times to come.
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