IndiGo and the Monopoly Question

Last December, the chaos and flight disruptions created by IndiGo were enormous and terrible. The penalty imposed on them was a paltry ₹22 crore (no prizes for guessing what must have transpired behind the scenes).

 

The root cause identified by the DGCA (Directorate General for Civil Aviation) though did make sense: “an overriding focus on maximising utilisation of crew, aircraft, and network resources”. Such an (over)emphasis then “significantly reduced roster buffer margins” and “adversely impacted operational resilience”.

 

But, while the above reason is valid, it wasn’t complete. IndiGo had clearly assumed the new regulations (on rest hours between flights) would not be enforced by the government and therefore had not prepared to meet them (by reducing flights or hiring more pilots/crew). And why did they make that assumption? Because they held a 65% market share, and they assumed that if they couldn’t/wouldn’t meet the new regulations, well, surely the government would postpone or cancel the new regulation altogether. But, as we know, the regulator didn’t blink, and chaos ensued.

~~

 

That 65% market share raised the age-old accusation that a (near) monopoly was the root cause of the entire situation. Nithin Sasikumar wrote an article on monopolies. IndiGo (65%) combined with Air India command a 90% market share. But if we just go with those numbers being the definition of a problem (or worse), then how about Airtel + Jio commanding 80% telecom market share?

“And then you have Amazon and Flipkart dominating e-commerce and Zomato and Swiggy in food delivery.”

 

The fears of a monopoly or duopoly are easy to understand:

“We just believe there’s a concentration of power in the hands of a few and that concerns us because the fear is that when an entity gets more powerful, they’ll initiate price gouging or profit maximisation. That they may not care much about service levels because they know they’re the only game in town. They’ll even lobby for rules that favour them at the expense of competitors.”

 

Are monopolies necessarily evil? Well, let’s first understand the different kinds of monopolies. First, there are natural monopolies. Railways. Postal service. Electricity. Gas supply. Water supply. Some of them are monopolies in specific regions, but the issue/concern is the same – people in that region don’t have a choice. Why do such natural monopolies exist? Because the barriers to entry are high – too much investment needed, profitability requires large size/coverage etc. Once a company dominates (region or country), it is not economical for anyone else to even try – a split market won’t generate enough returns for either, so why would a second company even try?

 

Then there are artificial monopolies. Patents and copyrights are one legal way to achieve these. Pharma companies are an example of this. Which makes sense – if a pharma company needs to spend billions to develop a medicine and test it, well, why would they even bother unless they would have a monopoly to sell it for a long enough period to recover their investment and make profits? (Of course, pharma companies try and extend their patents. But that is abuse. The point here is that up to a point, certain artificial monopolies are legal/by design).

 

Lastly, there are regular monopolies, where competitors could arise, there are no legal hurdles, there is room for more players, but where a single company wins by (mostly) merit. Think of Google or WhatsApp.

 

Notice we don’t include monopolies created by lobbying/bribing governments and regulators because that, of course, is illegal. Whereas all of the above types are legal. The takeaway from all this?

“You can’t paint all monopolies with the same brush.”

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Now let us loop back on IndiGo. How did it become the near-monopoly that it is? Well, you will notice is a regular monopoly – it became that way “by virtue of its own ruthless efficiency” in choice of fuel-efficient aircrafts, sticking to one type of aircraft, and low turnaround flight/crew time. Having gotten to that position, how many times did you hear complaints of them jacking up prices arbitrarily?

 

So while what happened in December was despicable, the only real connection to the (near) monopoly status was IndiGo’s gamble that the government would postpone/cancel the date for the longer rest periods for flight crew. Hardly an air-tight case to say that the entire cause was their monopoly status or abuse of their monopolistic powers.

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