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BW Businessworld

Well-Heeled Beggars

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Private airlines have made asses of themselves. First they asked the government for a whole lot of subsidies and sops. Then, when the government showed no willingness to oblige, the airlines threatened a strike. Then they changed their minds and called off the strike. Common people would feel anything but pity for the tycoons who control the airlines; many would be disdainful, and some may be delighted that rich guys are in trouble.

The root of the problem is clear: major sectors of the economy have suffered a downturn, companies have run into losses, many people are poorer, some have lost their jobs. In this downturn, the airline industry is amongst the worst hit. Businesses as well as people have cut down on air journeys. Demand for flights has fallen. Capacity utilisation of planes has gone down. But planes consume more or less the same quantity of jet fuel whether they fly empty or full. And many of their owners have bought the planes with borrowed money; the servicing costs of the loans do not get any lower if fewer passengers fly. Most of the airline owners have leased planes; but terminating leases also often costs money. So airlines are in the red, and there is no easy way of staunching those losses.

Airlines are not the only industry in trouble; all industries are suffering to a greater or less extent. But not all of them are forming rich men’s clubs and approaching the government for a bailout. What makes airlines special? What distinguishes the airline industry is its special status as a milch cow. All governments, whether at the Centre or in the states, regard the industry as an ideal victim. Taxes, levies, cesses, whatever name governments choose to give them, they are so many ways of exploiting the industry. The central government levies a massive excise duty on jet fuel. Its airport authority charges airlines through the nose for parking space. Passengers pay more tax to the government than they pay for their flights. The governments have undoubtedly gone a bit overboard in taxing this industry.

The governments could say that the airlines’ prosperity made them a fit target for taxation. The airlines did have five stellar years. They were not all making huge profits; but their passenger loads were going up so fast that they themselves were highly optimistic. The future looked so bright that the airlines hardly noticed the taxes they paid in the present.

But if prosperity made them attractive victims of taxation, the end of that prosperity should also see an end to the government’s raids. There is a certain logic to the airlines’ demands. It is understandable if the government taxes an industry’s profits. But most imposts on the airline industry are on anything but their profits. Some, such as the fuel tax, are on their costs; some are on their revenue. Even a government that does not see the need to reduce the taxes on the industry must be rational enough to see the argument about correct and incorrect bases of taxation. And there must be some uniformity in the taxation of different industries; there is no reason why airlines must pay absurd parking fees, and railways and taxis do not.

But rationalisation of taxes on the airline industry, however desirable it may be, will not solve its problems. Its financial troubles have a different cause: it lies in the mismatch between the industry’s risk profile and its financial profile. As a luxury industry, it is highly volatile. Its rapid growth and its recent shrinkage are evidence of its instability. Such risky ventures should be financed with risk capital. But the industry has borrowed heavily. It did so largely because debt finance was available; aircraft producers often came along with loan-bearing bankers when they made their sales pitch. So borrowing was too easy. And since the aircraft manufacturers were foreign, they wanted their money in dollars and euros; so the loans were also in those currencies. So as the government devalues the rupee, airlines’ servicing costs go up.

It is not only airlines that have borrowed in foreign currencies. Many big Indian companies have contracted such debt in the past few years; and all of them are in danger of default. Till now, the government has stood firm against the pleadings of the airline industry. But it is doubtful whether the government will be able to watch with the same equanimity when Indian businesses begin to default on foreign loans. That will not just be the funeral of those businesses; it will be a blot on India’s image. That is why the government should take the airline industry more seriously — now.

(Businessworld Issue Dated 11-17 Aug 2009)