Adam Smith, father of modern economics said...

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Adam Smith, father of modern economics said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices (The Wealth of Nations, 1776).

So on October 13, 2008, when Kingfisher’s head honcho Vijay Mallya turned toward Jet Airways’ headquarters in Mumbai’s Andheri suburb to keep his appointment with Chairman Naresh Goyal, the air was agog with speculation. What was cooking between the foes turned friends? The drama reached a crescendo when later in the evening, Goyal returned the favour. Along with his senior team, he drove down to the Kingfisher headquarters at Vile Parle, a western suburb in Mumbai and sat closeted for close to six hours with Mallya and his team. When the duo finally emerged, they made public their plan, a deal to control competition in Indian skies and possibly even air fares, and that too in full view of the government, Monopolies and Restrictive Trade Practices Commission (MRTPC) and the public!

There are many who are thinking it, few who are mumbling it and just about one or two who are calling the Jet-Kingfisher alliance a cartel. Yes! We did say cartel. Mallya and Goyal prefer to call it an alliance, but call a cartel by another name and it still remains just that – a cartel! Oxford Dictionary defines a cartel as: “an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition,” a phenomenon that runs against the very grain of free markets. Dangerously similar, this ‘alliance’ offers the two airlines a combined share of more than 60% of the domestic aviation market, leading to a near-monopoly situation. The plans, among other things, include code-sharing, cross selling of flight inventory and overall route rationalisation between the two airlines. And route rationalisation effectively means jointly cutting down supply, and a class X economics student will tell you that with supply down, prices are bound to automatically rise. If this is not cartelisation, wonder what is! To be fair to both of them, Indian aviation is undergoing its worst crisis ever. Rising fuel prices, increasing overhead costs, falling air passenger traffic and their combined losses totalling Rs.20 crore per day, literally forced the two competitors into each others arms. Goyal even says that the alliance was “needed by both of us to avoid bankruptcy.”

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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