India's civil aviation sector, often cited as a spectacular success story of private enterprise, is in serious trouble. There's an economic policy lesson here for all of South Asia. Last week, Jet Airways, India's largest private airline, decided to sack as many as 1,900 employees. Two days earlier, it had announced an "alliance" with Kingfisher Airlines, India's second largest private carrier. Both decisions have a common cause: overcapacity and mounting losses in civil aviation, triggering desperate cost-cutting.
Jet Airways reversed its decision to retrench the workers, including 850 cabin crew, who launched protests. But the Kingfisher alliance, with greater implications for the future of Indian civil aviation, stands. It will create a thoroughly undesirable monopoly.
What impelled Jet's chairman Naresh Goyal not to sack the employees? Goyal says his "conscience" wouldn't permit it.. After all, many pilots on the retrenchment list had shelled out Rs40 lakhs to get licences, while the cabin crew had paid Jet Rs55,000 as "security deposit".
Goyal is less known for his conscience than for his sharp business dealings, including charges of using laundered money, levelled by Right-wing former minister Arun Shourie. What apparently persuaded Goyal is pressure from civil aviation minister Praful Patel and Maharashtra Navnirman Sena chief Raj Thackeray, and the fear of public disapproval.
The factor that probably weighed the most was middle class--and media--sympathy for the sacked cabin crew, which represents what might be called the glamour component of this white-collar workforce, all very middle class and ambitious. The Indian elite shows very little compassion for far poorer workers, especially in the unorganised sector, who regularly lose their livelihoods under the impact of globalisation and liberalisation. Air-hostesses, on the other hand, are "people like us"!
Patel has started a debate on how to rescue airlines--as if they represented some worthy public cause. The industry's losses are mounting and will total $1 billion (Rs4,300 crores) on a turnover of $6 billion in 2007-08, and rise further to $2 billion next year. At this level, they will nearly equal the losses totted up by the aviation world's greatest loser, the United States, whose major airlines have long been in the red.
Jet Airlines has posted losses of Rs800 crores and Kingfisher a higher Rs1,000 crores. Even greater is Air India-Indian Airlines' combined loss of Rs2,144 crores for which the government must be mainly blamed for repeated failure to order new aircraft. The airlines owe the public oil companies more than Rs2,000 crores and Rs1,000 crores to the Airports Authority of India.
India's private airlines are in trouble for two reasons. First, they expanded recklessly in the past decade in efforts to grab as big a share of the market as rapidly as possible. Second, the government deregulated aviation, jettisoning prudential norms like adequate capitalisation, and allowing carriers to set their routes, schedules and time-slots. This led to wild competition and a 30 to 50 percent overcapacity. But relying solely on their recent experience of growth, the carriers kept ordering more aircraft to retain market shares, thus raising both overcapacity and losses.
The airlines nurtured the illusion that air travel would become affordable for "the common man" through sheer expansion. The entry of no-frills low-cost carriers like Air Deccan strengthened this illusion. Many airlines set their fares artificially and predatorily low to draw passengers away from rail travel. They forgot that economies of scale are small in aviation, where fuel accounts for 40 percent of operating costs.
Rail travel is inherently cheaper and ecologically vastly superior. (Airplanes leave a huge carbon footprint.) At any rate, flying an airliner will remain a dream for most Indians for decades. At the peak of the ultra-low fare regime, only three percent of the Indian population was flying! A significant proportion has now naturally gone back to the railways. By last year, thanks to aggressive pricing and overcapacity, several airlines became unviable. Jet bought Sahara and Kingfisher acquired Deccan. Such anti-competitive mergers shouldn't have been allowed, but went through.
Then came 2008's sharp rise in aviation turbine fuel prices. India's airlines formed a cartel and levied a minimum fare of Rs2,800, mislabelled as "fuel surcharge". That ended the low-cost aviation era, but not the industry's problems. The core problems can be traced to a single cause--mindless deregulation fashioned after the US model. Paul Stephen Dempsey, an expert in aviation and the law at Canada's McGill University, has lucidly analysed this. He concludes that barely a decade after the 1978 Airline Deregulation Act was implemented, the US airline industry lost all of the money it made since the Wright Brothers' inaugural fight in 1903.
After 150 bankruptcies and 50 mergers, the US now flies the developed world's "oldest and most repainted fleet". Of the 176 airlines which deregulation spawned, only one remains and that's bankrupt. Deregulation has led to greater monopoly and concentration, with just four airlines controlling two-thirds of the market. Rather than lead to a reduction in fares, as laissez-faire economists had forecast, deregulation led to a fare rise and a decline in service. Social time worth billions has been lost because of time-consuming hub-and-spokes operations to which many airlines resorted to cut costs.
India has learnt no lessons from the US experience. It continues to rely on deregulation even after it has manifestly failed on its own soil, as evidenced by the bankruptcies of Modiluft, East-West Airlines and Damania Airways in the 1990s, and confirmed more recently. Patel wants to stay with the model after giving generous Rs5,000-crore bailout to the airlines industry, including reduced duties on fuel and other undeserved concessions.
Patel sees himself as an industry promoter and representative, not a maker of rational policies or a regulator in the public interest. Worse, he supports the Jet-Kingfisher "alliance" although it's obnoxiously anti-competitive. The alliance will control 59 per cent of the market, which is way higher than the 7 to 15 percent market-share which attracts anti-monopoly/anti-trust action in most countries.
Of course, India is unique in this regard. Under Manmohan Singh's ideology-driven liberalisation, India defanged the Monopolies and Restrictive Trade Practices Commission, but has failed to appoint the promised Competition Commission. So monopolies merrily thrive under "free-market" policies! The ruling elite continues to repose blind faith in neoliberal free-market ideas even as these get discredited in the developed capitalist countries because of their contribution to crises, instability, destruction of wealth, inequality, and undermining of social cohesion.
Indeed, as the economics Nobel for Paul Krugman demonstrates, heterodox ideas questioning market fundamentalism have again become respectable, and even conservatives now want state ownership and strict regulation of banks, transportation, telecom, and oil and gas. Many mainstream western commentators are already declaring "the end of conservative dominance" in economic policy-making, British Prime Minister Gordon Brown is calling for a new Bretton Woods conference to renew global economic institutions, and numerous governments are nationalising chunks of private banks.
Many South Asian conservatives continue to play down neoliberalism's loss of legitimacy. They live in a time-warp and will inflict more pain and suffering upon us. The quicker we get them out of the warp, the better for all of us.
Praful Bidwai, a fellow of the Transnational Institute, is a senior Indian journalist, political activist and widely published commentator. He is a co-author (with Achin Vanaik) of New Nukes: India, Pakistan and Global Nuclear Disarmament.
