Corporate Jun 13, 2012
When the aviation crisis hit us some years back, we thought the travails related only to a loss-making state-owned carrier called Air India. Then we discovered a flying carcass called Kingfisher, and thought its problems must be related to the liquor baron's usual excesses.
However, even Jet Airways, SpiceJet and GoAir are losing money hand over fist. IndiGo is profitable, but the airline's president has said its profits in 2011-12 would be a "fraction" of what it was a year ago. And this when airfares are rising.
It is tempting to believe that once aviation fuel prices fall, airline fortunes will revive. Possible, but don't count on it. Falling fuel prices in a competitive scenario will bring falling fares, too. It will soon be back to square one.
So what is the right policy stance to take on Indian aviation?Will Aviation Minister's policy approaches work?
One thing is clear. The world over, airlines are capital hungry loss-makers. Very few airlines make money. Why should India, which has enough good causes to spend money on (poverty, infrastructure), be subsidising airlines or rescuing them, whether public or private? In fact, even in aviation infrastructure - airports - we are busy operating some of the costliest airports in the world.
In short, India has probably already lost the plot. Our aim should be to cut our losses, whether it is airlines or airports, and not invest more in a mirage. Airline nationalism does not work. It may even be anti-national. Spending Rs 30,000 crore of taxpayer money over a decrepit airline is anti-national when we can ask some other country or sucker airline to carry the can for us.
A corollary: We should let others invest here. We should just harvest the local jobs and the economic benefits of airlines and airport companies investing in India. There is no reason to allow cash-starved Indian companies like GMR and GVK to run airports, when their sole USP is a partnership with foreign airport operators. Airport investments should come from cash-rich foreign partners and this will happen only if they get to own the airports. The GMRs and GVKs are needless appendages. We can always regulate the airport operators so that they don't fleece us.
Trying to throw in a tax relief here or a policy reform there will not substantially change Indian aviation's fortunes. The fact is we have to completely change the aviation eco-system to become a big player in this league, but that is not going to happen in the current era of fractious coalitions and policy paralysis. Moreover, we need to get too many things straightened up for us to even consider aviation as our forte.
If this wasn't the case, the world's second largest airport operator, Fraport AG, would not be considering an exit with curses on its lips. A 10 percent investor in Delhi airport, Fraport India's chief Ansgar Sickert told The Economic Times recently: "We had some re-assessment... (and realised) that this government doesn't have any spine or drive. So I personally doubt that anything will happen in the lifetime of UPA-II."
Foreign investors seldom talk this way about host governments. Since Fraport did so, it really means we screwed up big in aviation.
Or consider this: Jet Airways draws more than 56 percent of its turnover from overseas operations, not India. And you though Jet was an Indian airline. We don't even know its full ownership structure. Jet loses less money abroad. And its global hub is in Europe, not India - Brussels now, and possibly Munich later.
India does not have any part of its act in aviation right. It has created airport monopolies in Delhi and Mumbai where fees are being raised to extortionate levels. It has high fuel taxes (levied mostly by states) that make airline operations unviable. It has a state-sector player whose gigantic losses and mismanagement are making the entire sector unviable. We have a very weak regulator and flouting of safety regulations is widespread.
None of this can be set right in a hurry for the following reasons.
Airports: Indian airports are barely viable due to the high revenue share they have to give government. (Delhi was recently given the okay to raise its fees by 345 percent, making it the world's costliest.) There is no scope for cheaper airports in metros with big traffic (Mumbai, for example) due to paucity of land. The Navi Mumbai airport is going to be even costlier than Delhi if it is to be viable.
Developing cheaper airports is the only way to go, but for this we need a completely different aviation policy: cheap land, connectivity to city centres from distant airports, etc. Our policy is heading in the opposite direction: high land costs, little investment in public transport and connectivity.
In urban areas, politicians and the land mafia have made land acquisition prohibitively expensive. So it is difficult to see politicians making a policy that will make land for airports cheaper - even assuming the landowners can be persuaded to sell.
A coherent airport policy will take some doing. It is beyond the capacity of the present dispensation.
Airlines: Aviation is a capital-intensive business. Though, in theory, one can take aircraft on lease and run an airline without too much capital, this keeps debts low at the cost of margins. Every airline thus needs a mix of owned and leased aircraft to be viable. But viability is a function of not only aircraft costs, but fuel, competition and other costs.
Costs are already going out of control on fuel and airport charges. Competition is paring margins, and the fact that Air India and Kingfisher are still around means fares will remain unviable much longer - which could push the other airlines into the red too.
Both Air India and Kingfisher should have been wound up so that the industry could consolidate by ensuring scale and cost advantages. But politics and hubris (as in the case of Kingfisher) won't allow this.
As for fuel, it is possible to cut state taxes, but why should this be done at their cost? Aviation fuel is actually cheaper than petrol in India, and since fossil fuel use needs to be controlled in a climate-challenged world, there is no long-term case for India to cut fuel taxes.
Regulation: India's airline regulation has been weak, and thanks to poor financial strength, airlines' internal safety standards may also be suspect, as the Directorate General of Civil Aviation found in a recent financial surveillance audit.
The audit had this to say about Kingfisher: "A reasonable case exists for withdrawal of their airline operator permit as their financial stress is likely to impinge on safety." About Air India Express, it said: "A prima facie case exists for restricting their operations in view of safety issues."
But both airlines are still in business. This suggests that the regulator does not ultimately have the gumption to crack down on airlines even on the all-important issue of safety. This could be due to political pressure or the need to protect jobs. But regulation cannot be done this way.
Traffic potential: With its huge growth potential, India's biggest plus in aviation is its market size. According to the International Air Transport Association (IATA), Indians make 0.1 trips a year, against 1.8 in the US. If we get to even a third of the US level we would have 700 million air travellers annually. Currently, the annual traffic is a tenth of that.
Traffic potential is Indian aviation's only trump card. And this is what we should leverage. We should use market access to get foreign airports, airlines and airport services companies to create facilities and jobs here. It won't happen in a hurry, but we can evolve policy bit-by-bit once we are politically in a mood for visionary moves with the guts to implement it.
Our gameplan, which does not involve much work on our part for now, should be to:
One, create a strong competition and pricing regulator for the aviation sector.
Two, allow domestic airlines to be taken over by foreign ones. Not 49 percent, but 100 percent, if needed. The nimbler domestic ones will survive.
Three, downsize, and if possible sell, Air India. Air India's pilots have helped by doing themselves out of a job, but the real solution is a generous VRS for the rest. Air India would be more profitable as merely an airline engineering services and ground-handling company than as a full-fledged airline. Kingfisher should be allowed to find its own route to hell. Its creditors need to call in all the loans or write them off and seize the collateral.
Four, plan to develop low-cost airport hubs outside the metros - but after creating fast transport links simultaneously. The Navi Mumbai airport, for example, will have a big problem clearing its passengers since little thought has been given to fast connectivity to Mumbai and Thane.
India has already lost the battle for aviation supremacy by emphasising the wrong things: primacy for Air India and domestic airlines, and being cussed about allowing competition and foreign equity, etc.
We have only market size working in our favour. We should use it sensibly.
More From R Jagannathan.