2012-05-08
The minister of civil aviation, Mr. Ajit Singh, informed the Rajya Sabha on May 3, 2012, that total operation losses for all airlines for the years 2008-09, 2009-10 and 2010-11 are R19,000 crore and a R10,000 crore loss is anticipated in 2011-12. Except for Indigo, all airlines are in the red.
The abortive divestment of Air India took place in the year 2001 when the airline had been practically divested to a joint venture between Tata and Singapore Airlines, but for a last minute hitch. This was followed immediately by the catastrophic incident of 9/11 at the World Trade Centre, New York, which put the aviation industry in India and worldwide into a down-swing situation and the Air India divestment could not take place. Had the divestment taken place, Air India would have been once again a leading carrier.
By 2004, after the UPA government took over, a decision was taken, without any stated reasons, not to divest Air India. At the same time, a large number of aircraft were ordered, numbering 111, together for Air India and Indian Airlines, the two public sector airlines. From all accounts, the number of aircraft ordered was more than the initial demand of the airlines and the orders were hiked up by persuading the management to increase the number, and a government guarantee was provided against the loan taken by the airlines, a case normally not done. As a result, any default by the two public sector airlines would be a direct government liability.
Three major mistakes were made during the period 2004 onwards. Kingfisher Airlines, which started operations in the year 2005, maintained a very high profile but never showed profits. The purchase of Air Deccan by Kingfisher in 2007, of Air Sahara by Jet in 2007 and finally the merger of Air India with Indian Airlines, announced also in 2007, all turned sour. All these three decisions have not brought the financial benefits expected. However, the major loss to this sector has been suffered by Air India (R17,800 crore), followed by Kingfisher Airlines (R7,000 crore). Another factor that has led to the current state is the rise of low-cost carriers (LCCs), which started in 2003 and, by their popularity, turned the airline industry upside down. LCCs now have a market share of over 70% and, therefore, full service airlines have suffered in comparison and started their own LCC subsidiaries, except for Kingfisher that decided to close down Kingfisher Red, its LCC subsidiary.
What should be the role of the government in this scenario? In a free-market economy that India has adopted (unlike China, where their airlines are showing good profits), airlines suffering losses have to either go into bankruptcy or merge into other airlines. This happens in the US and other western economies, too. This also happened in the Indian context, when airline companies such as East-West Airlines, ModiLuft and Damania Airways went under and were merged into other airlines through market processes. Are the market forces the best determination of prices, especially in the transport sector? Is ruthless competition the best answer when ticket prices swing from very low to very high? Why is it that Indian Railways follows a strict ticket pricing policy with no variation in high seasons? Is aviation still considered a rich man’s mode of travel and, therefore, prices don’t matter? Why has AirAsia, the leading LCC of East Asia, withdrawn from India? Why is there this new service tax on air tickets when it is not applicable on rail tickets? Why is the ministry of civil aviation a hapless onlooker to what is happening to their area of interest? Why is the Civil Aviation Policy still a draft after last 10 years? These remain unanswered questions.
However, having adopted the Western-style model, we did not allow either Air India or Kingfisher Airlines to go down. While the Prime Minister announced from Delhi’s Red Fort on the occasion of Independence Day 2009, that Air India will not be allowed to go under, Kingfisher Airlines was saved by public sector banks which converted its debt into equity at a very high rate and now own 23% of it, plus more debt.
There are two separate issues that are bringing down the aviation sector in India. First, it’s the government—both states and Centre. Over-taxation of this sector is, in fact, killing it. Taxes on a ticket reveal only a partial picture. The current budget has again imposed yet another hike in sales tax. The air turbine fuel (ATF) is another racket. The Rakesh Mohan Committee Report of the Working Group on Civil Aviation (January 2012) states: “As a result of all these factors and other tax-related issues, ATF prices in India are unduly higher than international benchmarks, resulting in a tremendous financial burden on Indian carriers. ATF prices in India are nearly 60% costlier than competing hubs like Dubai, Singapore and Kuala Lumpur.” It further states that “ATF is subject to a multitude of cascading taxes by different government entities”.
The government apathy in this context is baffling to say the least and can be termed as irresponsible. The second contention is that the airline pricing system is also killing the industry. The exit of AirAsia—a fast-growing LCC in East Asia—from India is on the grounds that it will not fly to a destination below costs. As taxes and levies go up, including airport charges, other foreign airlines may also abandon India.
While low-cost airline ticket prices are consumer friendly, the sudden and seasonal increase requires a sense of sanity for the industry. The concept of ‘excessive’ and ‘predatory’ prices finds a mention in the Aircraft Act of DGCA. However, as an umpire, DGCA is yet to determine what is meant by ‘excessive’ and ‘predatory’ and start implementing it as part of its mandatory duty.
Last but not the least, joining the airline group are the two major airports of Delhi and Mumbai, both improved under public private partnership and both turning sick.
The author is chairman of International Foundation of Aviation, Aerospace and Development (India chapter)
The minister of civil aviation, Mr. Ajit Singh, informed the Rajya Sabha on May 3, 2012, that total operation losses for all airlines for the years 2008-09, 2009-10 and 2010-11 are R19,000 crore and a R10,000 crore loss is anticipated in 2011-12. Except for Indigo, all airlines are in the red.
The abortive divestment of Air India took place in the year 2001 when the airline had been practically divested to a joint venture between Tata and Singapore Airlines, but for a last minute hitch. This was followed immediately by the catastrophic incident of 9/11 at the World Trade Centre, New York, which put the aviation industry in India and worldwide into a down-swing situation and the Air India divestment could not take place. Had the divestment taken place, Air India would have been once again a leading carrier.
By 2004, after the UPA government took over, a decision was taken, without any stated reasons, not to divest Air India. At the same time, a large number of aircraft were ordered, numbering 111, together for Air India and Indian Airlines, the two public sector airlines. From all accounts, the number of aircraft ordered was more than the initial demand of the airlines and the orders were hiked up by persuading the management to increase the number, and a government guarantee was provided against the loan taken by the airlines, a case normally not done. As a result, any default by the two public sector airlines would be a direct government liability.
Three major mistakes were made during the period 2004 onwards. Kingfisher Airlines, which started operations in the year 2005, maintained a very high profile but never showed profits. The purchase of Air Deccan by Kingfisher in 2007, of Air Sahara by Jet in 2007 and finally the merger of Air India with Indian Airlines, announced also in 2007, all turned sour. All these three decisions have not brought the financial benefits expected. However, the major loss to this sector has been suffered by Air India (R17,800 crore), followed by Kingfisher Airlines (R7,000 crore). Another factor that has led to the current state is the rise of low-cost carriers (LCCs), which started in 2003 and, by their popularity, turned the airline industry upside down. LCCs now have a market share of over 70% and, therefore, full service airlines have suffered in comparison and started their own LCC subsidiaries, except for Kingfisher that decided to close down Kingfisher Red, its LCC subsidiary.
What should be the role of the government in this scenario? In a free-market economy that India has adopted (unlike China, where their airlines are showing good profits), airlines suffering losses have to either go into bankruptcy or merge into other airlines. This happens in the US and other western economies, too. This also happened in the Indian context, when airline companies such as East-West Airlines, ModiLuft and Damania Airways went under and were merged into other airlines through market processes. Are the market forces the best determination of prices, especially in the transport sector? Is ruthless competition the best answer when ticket prices swing from very low to very high? Why is it that Indian Railways follows a strict ticket pricing policy with no variation in high seasons? Is aviation still considered a rich man’s mode of travel and, therefore, prices don’t matter? Why has AirAsia, the leading LCC of East Asia, withdrawn from India? Why is there this new service tax on air tickets when it is not applicable on rail tickets? Why is the ministry of civil aviation a hapless onlooker to what is happening to their area of interest? Why is the Civil Aviation Policy still a draft after last 10 years? These remain unanswered questions.
However, having adopted the Western-style model, we did not allow either Air India or Kingfisher Airlines to go down. While the Prime Minister announced from Delhi’s Red Fort on the occasion of Independence Day 2009, that Air India will not be allowed to go under, Kingfisher Airlines was saved by public sector banks which converted its debt into equity at a very high rate and now own 23% of it, plus more debt.
There are two separate issues that are bringing down the aviation sector in India. First, it’s the government—both states and Centre. Over-taxation of this sector is, in fact, killing it. Taxes on a ticket reveal only a partial picture. The current budget has again imposed yet another hike in sales tax. The air turbine fuel (ATF) is another racket. The Rakesh Mohan Committee Report of the Working Group on Civil Aviation (January 2012) states: “As a result of all these factors and other tax-related issues, ATF prices in India are unduly higher than international benchmarks, resulting in a tremendous financial burden on Indian carriers. ATF prices in India are nearly 60% costlier than competing hubs like Dubai, Singapore and Kuala Lumpur.” It further states that “ATF is subject to a multitude of cascading taxes by different government entities”.
The government apathy in this context is baffling to say the least and can be termed as irresponsible. The second contention is that the airline pricing system is also killing the industry. The exit of AirAsia—a fast-growing LCC in East Asia—from India is on the grounds that it will not fly to a destination below costs. As taxes and levies go up, including airport charges, other foreign airlines may also abandon India.
While low-cost airline ticket prices are consumer friendly, the sudden and seasonal increase requires a sense of sanity for the industry. The concept of ‘excessive’ and ‘predatory’ prices finds a mention in the Aircraft Act of DGCA. However, as an umpire, DGCA is yet to determine what is meant by ‘excessive’ and ‘predatory’ and start implementing it as part of its mandatory duty.
Last but not the least, joining the airline group are the two major airports of Delhi and Mumbai, both improved under public private partnership and both turning sick.
The author is chairman of International Foundation of Aviation, Aerospace and Development (India chapter)
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