Domestic airlines: From multiple players to monopoly

In January 2013, I flew from Kumasi to Accra with Fly 540 on a return journey that cost an average of $36 (GH¢ 80) that time.

Similarly, Starbow had an off peak fare on the same route for a little under GH¢ 40. The period between 2012 and 2014 saw a surge in the number of passengers on the domestic airline market. In his State of the Nation Address to Parliament in 2013, the then President, John Dramani Mahama, said: “Kumasi Airport is now busier than the Kejetia Lorry Terminal.”

At the height of passenger boom in the domestic market, there were five airlines operating in the market: Africa World Airlines, Antrak, City Link, Fly 540 and Starbow. In those nostalgic days, travelling by air was not a luxury enjoyed by the rich and the elite, but a common necessity that was to be enjoyed by “whosoever wants.”

In less than five years, the market players have been dwarfed from five to one. Factors such as high operating cost, depreciation of the cedi, nuisance taxes and fuel prices can be said to have partly facilitated their exit from the market. The only surviving player in the market is the Africa World Airline (AWA). Now it has become a field day for AWA and its monopoly.
Why monopoly is not desirable?

There is empirical evidence to prove that monopoly is not good. In the absence of competition from other market players, consumers have no choice but to “endure” the monopoly. The presence of multiple players in the market does not necessarily guarantee competition as some players can agree to fix prices and engage in market-sharing agreements. A functional competition policy and law coupled with multiple players will result in competition. Competition results in innovation, lower price, choices, quality of services, as well as options to choose from. In its absence, consumers have no choice than to take whatever the producer is offering.

Competition/Antitrust Laws is not against monopoly, it is against abusive monopoly. In the days when there were multiple players in the market, airlines were competing on prices. Now, AWA has no one to compete on prices. This means it can set its prices to maximise profit.

Let’s compare the table below:

From the table, it can be seen that it is cheaper for one to fly from Mumbai to Jaipur(India) for $67 (for 1 hour 40 minutes duration) than to fly from Accra to Kumasi (for $140 on 40 minutes flight duration). It costs more to travel to cities (like Accra to Kumasi, and Cairo to Alexandria) which have a monopoly than between Sao Paulo and Rio.

Though we cannot explain everything from the prism of competition, it is abundantly clear that an absence of competition results in high prices.

According to an Organisation for Economic Cooperation and Development (OECD) study titled, a Competition Policy Assessment of the Domestic Airline Sector in Mexico and Recommendations to Improve Competition, it was found out that the existence of a low cost carrier on a route resulted in average prices/km that are between 26 and 35 per cent lower, holding other factors constant.

The way forward

Firstly, one of the duties of every government is to promote competition in the market. Government achieves this through the enactment of a functional competition policy and law which seeks to guide the conduct of the market.

Competition law creates a level playing field and protects both consumers, as well as other competitors, especially smaller ones from abuses and other unfair trade practices.

Competition authorities have powers under the law to check abuse of dominant position. Recently, Google and Qualcomm were fined for abusing their dominance by the European Competition Commission.

Secondly, the government through the Ministry of Aviation and the Ghana Civil Aviation Authority (GCAA) must remove unnecessary barriers to the entry and expansion of competitors (especially low-cost carriers) and implement market mechanisms that result in the efficient allocation of scarce take-off and landing slots. This does not only apply to the domestic market but also regional and international routes. It is a regrettable fact that lack of competition on some international routes between Accra and other cities have made Ghanaians pay more on international routes. In Mexico, when the government removed entry and expansion restrictions, it increased the number of low-cost carriers entering unserved areas, consumers saved up to USD 300 million annually.

Finally, the government needs to do more by improving the microeconomic environment to protect investment in the aviation sector. Almost everything related to running airline is imported into the country. Weak cedi threatens investments and since demand for domestic airline seat is partly elastic, surge in prices can cause passengers to consider other methods of travelling. Removal of the Value Added Taxe (VAT) on domestic airline fare was enough but not sufficient.

Since the sector is in its incipient stages, tax incentives can result in growth and increase passenger volumes.

This I am confident that if implemented, can help create a more competitive domestic airline industry.

In conclusion, monopoly is not good for the economy. The government, instead of supporting AWA to meet the increasing demand, must rather promote competition in the sector. AWA in the period of high demand can consider cap fare prices regardless of demand. In this way, it becomes a win-win for consumers and AWA.

The writer is the Country Coordinator for CUTS International Ghana. CUTS Ghana is a research and advocacy public policy think tank. Writer’s Email: apa@cuts.org