Company Outsider: Don't blame duopoly for the poor service and high fares by Indian airlines

Last week’s liquidation orders for Go First appear to be another blow to India's airline passengers. With the options narrowing to Air India, IndiGo and the smaller fleets of a struggling SpiceJet and the newcomer Akasa Air, the spectre of a stifling duopoly by the first two in which fliers are burdened with high fares and poor service looms large. 

The failure of Jet’s revival plan and the baffling disappearance of Vistara, India’s best-run airline, further compounds those fears. Nor are these unfounded. Last month, year-end travel became a nightmare as airfares from and to major metros soared as airlines took advantage of the holiday rush to charge double the usual prices. The sad part was even at such usurious prices, passengers were not guaranteed a smooth flying experience. Glitches are routine with delays and other inconveniences now a routine feature of air travel in the country.

Passengers on an IndiGo flight had to remain inside the plane for 30 minutes after it landed because the ground staff needed to facilitate disembarkation went missing. Elsewhere, passengers on Air India flights have complained about defective seats and entertainment systems. These incidents are now so common, and across airlines, that they barely invite even a proper redressal from them.

Most people have laid the blame for this sorry state of affairs on the creeping duopoly in the sector with IndiGo and Air India between them having an 87% share of the market. Indeed, despite the complaints and poor service, both airlines have increased their market share in the face of dwindling competition.

But contrary to popular belief, it isn't duopolies that are the worst enemies of the market. Badly run airlines, including those that are financially mismanaged, do more to skew a sector by creating artificial imbalances. Kingfisher in 2010 and Jet in 2018 gave the airline business in India the air of perfect competition. 

In 2017, Jet had a 15% share of the market while Air India and SpiceJet had 13% each. In reality, all three airlines were flying on empty, the first propped up by loans from banks and the latter by government largesse. This prevented better-run airlines like IndiGo from claiming their rightful share.

Merely the presence of multiple players does not ensure good service and competitive pricing for customers. In 2005, Air Deccan set off a race to the bottom for Indian airlines with its ₹1 ticket offer. While a smart marketing offer, it did little for the finances of the company or the industry. Gimmicks grab eyeballs but don’t translate into benefits for customers.

Economic theory tells us why that happens. The Bertrand model, named after economist Joseph Bertrand, states that in a market with perfect competition and identical products, the price will ultimately fall to the marginal cost of production, resulting in zero economic profit for all firms. 

On the flip side, William J. Baumol’s Contestable Market Theory claims that if there are no barriers to entry and exit, even a monopolist will act competitively since the threat of new entrants constrains the behaviour of incumbent suppliers.

This implies that the structure of a market isn’t necessarily interlinked with the behaviour and performance of its participants. In mature industries, where only a few companies can operate profitably, a duopoly actually works to the advantage of customers. Visa and Mastercard in the payments space are a good example as also Google and Apple with smartphone operating systems. 

In India, since the closure of the various regional stock exchanges, NSE and BSE have, between them, provided reasonably efficient platforms for trading while continuing to innovate.

A well-functioning IndiGo and an efficiently run Air India, with a hungry newcomer like Akasa snapping at their heels, can make a good enough combination to ensure Indian fliers get value for their money. The missing link is a regulator that does its job first by clearly laying down the rules governing how airlines treat their customers and then ensuring those rules are not ignored. 

For all the complaints that passengers have raised about the service and product quality, action from The Directorate General of Civil Aviation (DGCA), which is responsible for the safety and regulation of air travel in the country, is visibly missing. Thus, one of the responsibilities of DGCA is “formulation of standards of airworthiness for civil aircraft registered in India and grant of certificates of airworthiness to such aircraft". 

But passengers who have been forced to sit on defective seats have had to approach consumer courts for redressal since the regulator doesn’t have a clearly defined policy on penalizing the airline in such an instance.

There’s evidence to show that the fact of being one of 2-3 dominant firms in a sector actually makes them more competitive and responsive to customer needs while their duopoly status gives them the incentive for taking the risk inherent in a business like airlines.