(Weekly Organ of the Communist Party of India (Marxist)
October 19, 2008
Do private airlines deserve a bailout?
PRIVATE airlines in India have come a long way from the heady days of just a couple of years ago. Passenger traffic in India was showing a booming annual growth rate of over 25 per cent per year, among the highest in the world, largely it was said because of deregulation of the Indian civil aviation sector and giving up State-sector monopoly. Private airlines were mushrooming and placing huge orders for new aircraft, making India a favourite hunting ground for Boeing and Airbus. Budget carriers were offering unimaginable low fares, and government spokespersons especially the minister for civil aviation, Praful Patel, were boasting of having brought air travel within the reach of the “common man”.
Suddenly, or so it seems, everything has gone sour. Smaller and so-called low-cost airlines have been swallowed up by the big private carriers, Jet Airways and Kingfisher, who have themselves now entered into a surprise “alliance” tantamount to a private monopoly. All airlines now admit that the industry faces a crisis. And now CEOs of private airlines have got together and asked the government for a $1 billion (Rs 4800 crore) bailout package! It appears to be open season for bailouts: brokerage houses, investment and commercial banks, insurance companies in the US and Europe have been handed bailouts, so why not private airlines in India?
Many questions have been asked about the US and EU government bailouts of what were thought to be pillars of western capitalism, vanguards of a movement to free corporations from governmental interference in a deregulated global economy. These questions are relevant here too. Besides, there are also vital questions about the very structure of passenger air transportation.
But first let us look at the specifics of the crisis that could help understand where the core of the problem lies.
Fuel prices blamed
At the top of the list of causes blamed by airline executives for the crisis is the high price of aviation turbine fuel (ATF), and especially high tax rates both nationally and at state levels with local taxes varying from 4 per cent to 16 per cent in different states.
It is indeed true that ATF is priced considerably higher in India than in the US or many European and South-East Asian countries. But this situation is not new and has prevailed for several decades now.
Moreover, all studies on international aviation have shown that cost of fuel is only one among several factors affecting the viability of airlines. Fuel efficiency of aircraft, with older planes consuming much more fuel and with higher maintenance costs than newer fleets, operating efficiency of the carriers, passenger loads and densities, routes and numbers of halts, labour and other operating costs are all important factors. Studies comparing different airlines have shown that leave alone fuel costs, even operating costs taken as a whole may not be a simple indicator of the airline’s competitiveness or bottom line. For instance, International Civil Aviation Organisation (ICAO) data shows that Singapore Airlines with a low operating cost is among the leading airlines in the world in terms of profitability, but so is Lufthansa which has 2.2 times the operating cost. Alitalia has operating costs around the same level as Lufthansa but has gone bankrupt, while the US carrier Continental is doing fairly well with operating costs only slightly lower.
If one has to look at fuel costs alone, ATF prices in Delhi are comparable to those in Budapest, only slightly higher than Zurich or Jeddah, but significantly higher than Frankfurt (home base of Lufthansa which has among the highest operating costs of all airlines) or New York, which has the lowest fuel costs, but with four out of six major US carriers in serious financial difficulties, with Delta and Northwest, each with losses of over $4 billion last year, having merged in order to stave off bankruptcy. In overall terms, fuel constitute about 40 per cent of total operating costs of most airlines around the world, this percentage having increased by 3-6 per cent in the past year due to skyrocketing oil prices.
Yet high fuel prices have prevailed before too and have not always correlated with poor airline viability. In the 1970s, during the first oil shock, oil prices shot up by 300 per cent but no airline went out of business. In the early ‘90s, ATF prices were around $0.80 per gallon, much lower in real terms than the $1/gallon price prevalent about a decade, but several airlines in the US started folding up, due to a series of effects triggered by deregulation. The US airline industry suffered losses of $10 billion in 2004, much before the sharp rises in oil prices of recent times.
Oil prices have come down sharply in the past two months, but airlines in India have not reduced fares, citing accumulated losses from previous years. Nor has the drop in fuel costs staved off the crisis.
A few carriers are still earning profits and expanding, even in these difficult times, but most airlines around the world are reacting to higher fuel prices by adopting different strategies. Some airlines are trying to lower their take-off weight by removing a few seats, some doing away with trolleys by crew simply bringing trays to passengers or by using trolleys made of carbon fibre. Some carriers have even decided to stop carrying in-flight magazines and newspapers. Others are reducing frills, some are downsizing and some are cutting routes and capacity.
In the US, various methods of raising revenues from passengers are being adopted. Several airlines now charge for checked-in baggage, and Air Canada has only recently dropped its charge for second checked-in-bag in response to recent drop in oil prices. It has now become almost routine for airlines to charge extra for giving passengers a choice of seats, or in-flight movies. There are even suggestions, even if made jokingly, that passengers be charged according to their weight, it being estimated that US carriers spend about $275 million per year on overweight passengers! All these measures are, of course, merely disguised forms of raising fares without making it admitting it or making it universal.
In contrast, airlines in India have confined themselves to pleading with the government to bail them out in one way or another. One perceptive aviation commentator has rightly commented that so-called low-cost carriers (LCCs) in India are actually only low fare carriers with no innovative ideas or measures to actually reduce costs except not serving passengers meals. The industry federation has even pressured the government to set up a task force headed by the union cabinet secretary, no less, to suggest “measures to ensure sustained growth” in the industry. But other than asking for poorly disguised subsidies, the airlines have not shown any initiative to reduce costs. Jet Airways’ balance sheet for last year shows that, while fuel costs did indeed rise dramatically, so too did other costs which rose by around 46 per cent!
All these point to several structural problems in the airline industry other than fuel prices. But airlines, especially in India, would rather hide these problems away from public view and focus on only one aspect, namely fuel prices and other input costs such as landing charges. Lower fuel costs, say by lowering taxes as demanded by the industry association, may help improve bottom lines but will not tackle some basic issues.
In the ‘60s and ‘70s, air travel used to be universally regarded as a luxury, a form of transportation accessible only to the rich. Even in the US this started changing only in the ‘80s and ‘90s with passenger aviation being deregulated in the US and Europe under the influence of Reagan-Thatcher ideologies. Airlines increased capacities significantly and lowered prices. Low cost carriers and so-called “air taxi” services soon came up and the further lowering of prices saw air travel booming within countries such as the US, or within regions such as Europe, or even internationally.
India caught up with this trend somewhat later, first with the opening up of civil aviation to the private sector and then by deregulation in stages.
Private carriers moved aggressively, buoyed by pent-up demand and rising passenger traffic. Huge capacities were built up and new aircraft were ordered by the hundreds. Flights between metros went up from a few each day to several dozens daily, often with fewer passengers than crew! Low-tariff carriers reduced fares to rock-bottom levels and full-service carriers (FSCs) offered large quantities of discounted tickets. Private carriers, both FSCs and LCCs, wanted “open skies”, with full freedom and no regulation whatsoever.
This reckless expansion of capacities and undercutting of fares was allowed to proceed unchecked by a government committed to laissez faire policies, giving licenses to anyone who asked for one, and refusing to set up a regulatory body for the civil aviation sector which does not exist even today.
Reluctantly, airlines were forced to raise prices but mainly blamed it on rising prices while, it must be said, pointing some fingers at the throwaway prices offered by budget airlines. Yet they continued with their reckless expansion. Kingfisher, despite huge losses year after year, bought out India’s largest budget carrier Air Deccan and then launched international flights. Jet Airways continues to lose on its international operations and is desperately looking for alliances.
All these artificially boosted air passenger traffic to around 150 million per year, with analysts projecting air traffic to rise as high as 310 million people by 2012. But, with rising fares, passenger traffic has been plummeting, having dropped 17 per cent over the past few months compared to an annual growth rate of 27 per cent in the last four years.
Fact is that passenger aviation in India is hugely overstretched with too much capacity with airlines and fares being artificially low, a structural problem now acknowledged even internationally. Some commentators lament that we may see the return of the “bad old days” of higher fares. Point is, the present fare structure and overcapacity are unsustainable. Can or should air travel cost the same as traveling by rail or road? (The EU is even contemplating legislation adding an environmental surcharge on air tickets due to the more harmful emissions of aircraft in the upper atmosphere.) Can a taxi charge only as much as a bus? And should the government intervene to ensure that this happens?
This is no pinko-socialist argument. Credit rating agency and market analyst, CRISIL, says that losses for airlines in India would continue “if they do not quickly undertake a revenue augmentation exercise in conjunction with cost reduction measures and efficiency improvement initiatives” and that “a structural increase in ticket prices is required."
So why bailout?
There can be little doubt that the aviation industry will now go through a very painful shakeout. The higher fuel prices and operating costs may well force smaller LCCs to shut down, merge or sell out. The larger FSCs, Jet and Kingfisher, have already come together in an alliance to “rationalise” operations. All such rationalisation could have been achieved in advance through an independent regulator which the private airlines resisted and the government did not want. Kingfisher’s Vijay Mallya stated confidently that his alliance with Jet Airways would save the companies over Rs 1500 crore annually. Then why the need for a bailout? So why should the government, and therefore the taxpayer, now pay for this recklessness? And, if they do, what will the private airlines give in return?
Kingfisher, Jet Airways and the civil aviation minister are all singing in chorus that the airline industry is going through a crisis and must be rescued. "The government will have to see to it that we are viable", Jet Airways chairman Naresh Goyal said on October 16, 2008. The same business people who wanted government to stay at arms length now want the government to bend all the rules to help them out. The same government officials who argued against the State sector in aviation on grounds that it depended on artificial subsidy, now want the private airlines to be given subsidies. What else is it when Kingfisher-Jet Airways asks for reduction of landing, parking and other ground charges at airports? The private Bengaluru airport rejected out of hand any such reduction saying it will just not be viable to do so.
In the recent bailouts by the UK, and then the rest of the EU and lastly by the US, the State has acquired stakes in the banks or other financial institutions that have been provided liquidity and imposed several other conditions. Will the Jet-Kingfisher cartelisation, or alliance as it pretends to be, attract scrutiny under Competition laws? Will Kingfisher-Jet agree to sell substantial stakes to the government? Will the government even demand such stakes, or protection of employees’ interests, in return for a bailout? Will the association of private airlines and their minister agree upon the need for an independent regulator and give such an agency teeth?
There are far too many uncomfortable questions for a simple bailout answer.
Recent trends in Air Passenger traffic in India