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BW Businessworld

The Rights And Wrongs

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I was going through a report by a consultancy firm on India’s aviation sector and it struck me that while things have gone right in some ways, they have also somehow gone wrong. I clearly remember a time when we had just Indian Airlines and Air India, and very few foreign carriers to fly out of India as choice. Ticket prices were exorbitant and seats were hard to come by.
 
Then the government realised that liberalisation of the skies was no longer just desirable but essential, and it allowed many private airlines to come in. It also began to hand out bilateral seats more liberally.
 
Suddenly, the customer was actually king and could choose from an array of airlines. I even recall buying four tickets (return!) for just Rs 10,000 from Delhi to Goa, and that too in peak season, in 2006.
 
In 2013, choices still abound but almost all the airlines are struggling. Some carriers have gone broke (Kingfisher and Air India), while most others are on the brink of bankruptcy (Jet Airways). Their accumulated losses over the past six years is $8 billion and debt is at $16 billion, and growing. By year-end, it is estimated to hit $20 billion. Losses in 2012 alone were $2 billion. CAPA, or Centre for Aviation, estimates that the immediate funding requirement for the sector is $2.5 billion.
 
What went wrong? During the 2004-08 period, airlines expanded at break-neck speed, adding far more capacity than the market could actually absorb. Competition was fierce and fares hit rock bottom. Airports couldn’t keep pace (increasing airline costs) and poaching was rampant, which led to higher employee costs. The rupee lost strength, which made aviation turbine fuel expensive. But states refused to pare taxes to help counter this increase. 
 
Moreover, in an attempt to ape successful carriers, many players implemented confused models and ran inefficient operations. Some amount of consolidation happened but it only added to the problem rather than solve it. None of the mergers and acquisitions — Jet buying Sahara, Kingfisher buying Deccan, or Air India and Indian Airlines merging — worked out as expected. In fact, Jet executives even today privately blame the Sahara buyout for their problems. They feel that had Sahara not been thrust on them, their airline would have continued to be in the pink of health. 
 
The aviation sector was stuck with a bunch of high-cost airlines, seats sold at unviable rates, and a capacity that could not be absorbed. All the players had debts to service (especially for aircraft purchase) and, with rising interest rates, the burden seems almost impossible to handle today. 
 
So, what lies ahead? As I see it, even the public sector banks are reaching the end of the tether with the Indian aviation sector (the private lending sector mostly stayed away anyway). ATF prices will remain high, and banking on the rupee strengthening would be naïve. States are unlikely to relent and lower taxes on the industry. 
 
So what can be done realistically? Two or three things can certainly be done. One, airlines that are on the brink of closure or failure should be assisted and, in fact, encouraged to shut shop. Failures are a natural phenomenon in economies and the government need not live in mortal fear of this.

Globally, close to 330 airlines have shut down since 2008. This can often be the best thing for the survival of the sector. Inefficient players can cause havoc. They can harm not only themselves but also their rivals by, for instance, resorting to unrealistic pricing techniques. Air India has done this more than once to try and grab marketshare. Most such attempts have only amplified everyone’s losses, leaving all players worse off.
 
Two, bilaterals are in a sense a national asset or resource and should be treated as such. Rights should be fairly divided between Indian private players and foreign carriers. In fact, I would go further and say that wherever possible, rights should first be handed out to Indian players. And why not? That’s what every country does.
 
Third, we must beef up our airport infrastructure as soon as possible. Allow the private sector to do this as far as possible, and across the country. One can always have a bone to pick with DIAL and MIAL (Delhi and Mumbai international airport companies). But whatever one might say, I shudder when I recall the way the Airports Authority of India managed facilities. What we have now is undoubtedly an improvement, even if the price paid is higher than it ought to have been. As we privatise further, I am sure that the lessons learnt from the first few ventures will help. Because, often, failure to act costs more than imperfect action.
 
anjulibhargava(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 21-01-2013)