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Thursday, 11 April 2013 00:00
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Aviation ministry vetting business plans a bad idea

 

Given the fiasco with Kingfisher Airlines flying itself into the ground, it’s perhaps understandable the civil aviation ministry should want to satisfy itself that Malaysian carrier AirAsia’s low-fare model is a financially sound one even though the airline got an FIPB clearance last month. After all, apart from the huge losses that banks face with Kingfisher not able to repay its debt, passengers have been hugely inconvenienced and, as Kingfisher withdrew more and more of its capacity from the system, this resulted in fares going up. Much better then, the logic goes, the aviation ministry satisfy itself any new entrant is financially viable before a license is issued.

Problem with the idea, however, is in its execution. No airline, or any other company for that matter, will knowingly get into a business with the intent of making a loss, except for some initial start-up years. So if AirAsia, or any new entrant, is to submit a plan showing profitability after a few years, will the ministry just accept the plan or will it raise red flags over the assumptions? Indeed, were the principle to be applied uniformly, which means to existing airlines as well, many licenses may have to be cancelled. Air India, for instance, has been making losses for so long, and has projected losses for so long, it required a government assurance of a bailout of R30,000 crore over the next 8 years—and anyone who thinks the restructuring plan of Air India is easily achieved should read the Deloitte report on the airline’s restructuring plan. In the case of Jet Airways, while the airline made a profit of R85 crore in the December quarter, it made a loss of R100 crore in the September quarter—for the 9 months ended December 2012, profits were R10 crore versus losses of R938 crore in the same period in 2011. SpiceJet made a profit of R102 crore in December versus a loss of R170 crore in the September quarter—in the first 9 months till December 2012, it made a loss of R5 crore versus R357 crore in the same period of 2011.

Ideally, once the aviation ministry comes up with some minimum net worth criterion, say, it has to leave things to the market. When is the last time you heard of the telecom regulator, or say any electricity regulator, asking a company to exit the market when they started making losses? When telcos or electricity producers start making losses, and can’t arrange funding to cover this, they simply get taken over or just shut operations—new players then come in, or existing ones raise capacity. There’s no reason why things should be different with an airline. If the fear is the airline will start cutting back on safety once it starts running out of cash, it would be better if the airline regulator concentrated on enforcing safety standards and regular inspections of aircraft.

 
 

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