Air India subsidies played a big role in grounding Jet PDF Print E-mail
Friday, 25 January 2019 00:00
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In hindsight, it would appear the beleaguered Jet Airways got it wrong by opting to run a full-service airline in a country that just about made it to lower-middle-income status a few years ago, but the jury is out on that one. Certainly, the airline market is dominated by IndiGo’s low-cost model, but Tata Motors’ low-cost Nano flopped and Maruti Suzuki’s semi-premium models like the Baleno are selling better than the economy ones like the Alto. What is quite unambiguous, though, is the role played by the government—including the high taxes on aviation fuel in various states—and the refusal of the country’s competition watchdog, the Competition Commission of India (CCI), to do anything about this even though it falls under its ambit in the broad sense of the term.


The loss-making Air India, as Bloomberg Opinon columnist David Fickling pointed out in this newspaper on Thursday, is a full-service carrier—like Jet Airways—but its ticket prices resemble those of a budget airline. Over the past few years, data from the Directorate General of Civil Aviation show that Jet’s passenger yields are significantly higher than IndiGo’s but Air India’s yields aren’t very different. In 2017, for instance, Jet’s yields were `4.4 per revenue passenger kilometre (RPK) versus `3.7 for IndiGo (18.9% higher) and `3.9 for Air India (just 5.4% higher than IndiGo); in 2014, in fact, while Jet’s yield was `4.9 versus IndiGo’s `4.5, that for Air India was even lower at `4.3 (goo.gl/M87pk7).

No two airlines, it is true, are the same, so comparisons are difficult but, without a massive cash infusion by the government—`32,809 crore so far since FY10—the airline would have shut down a long time ago; while data for FY18 is not out, between FY09 and FY17, the airline made losses of `47,629 crore which brought down its net worth to a negative `16,802 crore in March 2017. Indeed, the airline’s ability to raise money, and the banks not taking it to the insolvency courts, is based on the implicit—and explicit—guarantee it enjoys as a PSU. Had the free cash infusion, and the government guarantee, not been available, Air India would have either shut down or withdrawn from various routes; and, most certainly, it could not have priced its tickets as low as it does; more so since its staff costs are at least 30% higher than those of rivals like IndiGo and other costs are 2.4 times as high. How much of an impact Air India’s withdrawal of operations from many routes or even shutting down completely will have is not clear, but it is obvious that if 15% of the capacity average over 2014-18 is withdrawn from the market—and much more in the full-service part of the market—fares will rise significantly.

Despite the deleterious impact of the cash infusion on the competition being obvious, the government never consulted the competition watchdog on this; sadly, it didn’t occur to CCI that it should have stepped in to make its point about the impact, and quite publicly at that. Nor is this the first time CCI has been caught napping on the impact of government subsidies, whether implicit or explicit. So, while the Vajpayee government came out with a policy to allow private sector firms to set up petrol pumps, high subsidies on both petrol and diesel ensured that both Reliance Industries and Essar Oil had to shut down their retail operations eventually since consumers found it cheaper to buy fuels from the PSU oil companies IOC, HPCL and BPCL. A similar scheme to bring in private sector players into the cooking gas market also ended in a fiasco for the same reason. So, while condemning Naresh Goyal for not running his airline well, or Vijay Mallya before that, it is important to also keep in mind the government’s role in this.


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