Airing India's Airline Grievances: My take on airline competition

• BUSINESS ASIA
• JANUARY 4, 2011

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.

The Air India Fiasco: WSJ editorial

Review & Outlook Asia. March 15, 2010

The Air India Fiasco

New Delhi can save its carrier by privatizing it.

Madison, Wisconsin isn't the only place union shenanigans are exposing cracks in the state sector. The pilots' union at India's public-sector airline, Air India, last week threatened to go on strike starting today unless its demands for better pay and working conditions are met. But instead of taking a tough Madisonian stance, India's avuncular Minister of Civil Aviation Vayalar Ravi insists that matters of pay and working conditions are "between me and my children."

The real problem isn't what the union is demanding. It's that India has an airline that is run by politicians and hence can be milked by various interest groups. Such a firm can't compete against the private sector. Air India has built a reputation for poor service and long delays, as well as other absurdities. In a 2009 episode, pilots got into a fist fight with the cabin crew; in another tale that year, a rat was found on a Toronto-bound aircraft.

Contrast that with the new airlines set up after New Delhi deregulated the industry in the 1990s, which have built a customer base by offering excellent value for money. In the face of this competition, Air India's market share has fallen, despite charging the lowest fares courtesy of the taxpayers.

Low prices and fewer customers don't make for good business, and the airline has been in the red for the last four consecutive years. It racked up losses of 55 billion rupees ($1.22 billion) for the most recent accounting year ending March 2010 and stood indebted for some 400 billion rupees at the end of calendar 2010. Losses are expected to hit 70 billion rupees for 2010-11.

At the other end of this profit and loss statement are the airline's high costs. Its political masters are quick to point to high fuel prices in 2008 as well as big capital acquisitions before that. Yet private players also experienced the same business cycle. Their combined losses were lower than Air India's that year.

To be fair, one specific difference is Air India's botched 2007 merger with its sister state-owned carrier, Indian Airlines. A parliamentary panel has argued that the merger may have been flawed from the start. Still, a former aviation minister admitted that "vested interest in the unions," among other factors, worked to "defeat the merger."

The national carrier has been a plaything for countless politicians and bureaucrats for decades. Mounting losses in 2009 may have forced the government to promise to keep its hands off: It appointed a respected bureaucrat to turn the firm around and brought in independent directors and management from the outside. But old habits die hard. In the past month, one of those directors has offered to resign and all the outside executives have either been fired or have quit. On Feb. 28, one executive resigned after telling a local newspaper: "When you call someone from outside, let him work. The government should control but let him work. It should not be involved in day-to-day operations."

The biggest factor, of course, is how this political class mollycoddles the voter base of unions. New Delhi has allowed the airline to run on a bloated labor force, and offers that labor force unimaginable perks. For instance, current and former employees—and their family members—can travel for free to many destinations in business or first class, though the airline has recently said it's curtailing this perk. Private airlines experience their share of union strikes, but are usually able to arrive at a reasonable compromise. Air India's workers, like public-sector employees in any part of the world, know they're negotiating against deep taxpayer-funded pockets.

The Congress-led government has had no qualms further softening the carrier's budget constraints. The annual budget late last month announced a bailout of 12 billion rupees, the second in two years. In 2010, the government infused 20 billion rupees worth of equity to keep the airline flying. It didn't help.

The only way to save Air India is to privatize it. The longer New Delhi waits to sell off this asset, the more unions—and political interference in general—will bleed it.