Airing India's Airline Grievances
Blame government, not the market, for a recent spike in fares.
By ABHEEK BHATTACHARYA
India's aviation industry should be a poster child for the benefits of liberalization. Speaking last month, Columbia economist Jagdish Bhagwati reminisced about the previous lack of airline competition in India: "I remember how, on a flight of [a state-owned carrier] . . . the stewardess had brought breakfast with the tea already made Indian-style: one part tea, four parts milk, and spoonfuls of sugar. When I complained, she answered, 'That is the way we serve tea. . . .'"
Today, thanks to a round of deregulation, a traveler in India can choose from 10 carriers offering a range of services at competitive fares—and tea any way you like it. So it's worrying if New Delhi ends up undermining that progress, ironically by claiming the industry isn't competitive enough.
Before 1994, only the government could operate full-fledged airlines. Since these regulations ended, new carriers have taken wing with a variety of business models. Kingfisher and Jet Airways are full-service airlines that operate domestic and international routes. Others, like Spicejet and Indigo, offer a low-cost alternative. Competition has pushed fares downward to the point that, in combination with rising incomes, air travel is now a viable option for millions.
Yet this success is bringing the industry into the sights of regulators. Last month, the Competition Commission, India's antitrust watchdog, announced it would begin an investigation of supposed airline cartelization after fares rose by as much as 100% on some routes in November. The airline regulator asked airlines to publish a table of their tariffs every month.
Aviation Minister Praful Patel also decried the fare hikes as evidence of "predatory pricing." Perhaps it's a sign of India's progress that politicians, who once would have confined their ire to the prices of staple foods like onions, now vent about air travel. But they misunderstand how this market works.
The rising popularity of air travel has translated into a secular rise in demand. In 2010, passenger traffic was 18.9% higher than in 2009. And November was holiday season this year, with the important Hindu festival Diwali falling on the fifth; that pushed passenger demand up by more than 20% compared to November 2009. This rising demand bumped up against lower supply after carriers trimmed schedules and grounded planes following the 2008 global slowdown.
In this environment, the key to keeping fares low and service high is to foster more supply. A regulatory crackdown is exactly the wrong way to do this. For starters, an antitrust investigation threatens existing carriers with higher legal costs, not to mention possible fines if the investigation finds against them. Instead, the government would be better off looking in the mirror to see how it has impeded competition among current players—and, more importantly, raised entry barriers for new airlines.
In theory it is easy to secure approval for a new airline, but in practice a variety of barriers still exist. For instance, carriers bear the burden of taxes on aviation fuel that are 60% higher in India than in other markets. And while foreign investment is supposedly welcome, investment by foreign airlines like Lufthansa or Cathay Pacific has been banned since 1997. This blocks capital from the foreign companies most likely to know how to run a successful new airline venture.
More worrying still are hints of close ties between industry incumbents and the government itself. This is most obvious in the case of Air India, the ailing state-owned carrier. Rather than privatizing, New Delhi continues to subsidize it. As a result, private carriers must compete against the government's deep pockets.
Meanwhile, a recent corruption scandal has raised the prospect that certain private carriers may receive more favorable treatment than others. The November release of taped phone calls between lobbyist Niira Radia and other power players sheds some light. In one tape, a parliamentarian is heard telling Ms. Radia that Mr. Patel "worked as a minister for" Jet, and now for Kingfisher. While there is no evidence of outright bribery, the implication is that friendly ties led the ministry to favor the interests of those carriers in regulatory matters. In another tape, Ms. Radia says Mr. Patel stripped assets from the state carrier, Air India, "so that he could give it away to" Jet and Kingfisher. Mr. Patel denies the allegations; Ms. Radia has accused the media of "spreading stories of misinformation and malice."
Overly friendly ties between incumbents and regulators could explain measures like the ban on foreign airline investment. Its implementation in 1997 happened to coincide with an attempt by Ratan Tata of the Tata conglomerate to start a new airline in collaboration with Singapore Airlines. Three successive efforts were rebuffed in 1995, 1997 and 2001. In November, Mr. Tata suggested publicly that someone within the government had actively thwarted that plan.
To the extent government officials are correct that the industry still isn't as competitive as it could be, they are the ones to blame. If regulators push ahead on investigating "price fixing" and overregulating tariffs, instead of pushing reforms, they could kill the golden goose before it has a chance to really take off.
Mr. Bhattacharya is an editorial page writer with The Wall Street Journal Asia.
No comments:
Post a Comment