Crash Test Dummies in Indian Skies

The wreckage that is India’s aviation sector makes a revival plan urgent. Start by freeing Air India of state control.

Aircraft designers used to worry about ways to keep pilots awake on long-haul flights. Razzle-dazzle instrumentation in the cockpit was part of the answer. With Air India as a customer, they may well have to worry about providing boxing-ring padding next.

However, the allocation of first aid kits ought to go to investors in aviation, the ones left with all the bloody noses these days. It’s not as if they were not warned. On being asked for his opinion on the industry several decades ago, Warren Buffett, the legendary investor and chairman of Berkshire Hathway, remarked that the Wright Brothers’ invention was one small step for mankind, but a huge step backwards for capitalism. “If there had been a capitalist down there [at Kitty Hawk], the guy should have shot down Wilbur,” he quipped at the time.

The aviation industry has remained a byword for wealth destruction. If you tally the profits and losses of the aviation business since the aeroplane was invented, you’d end up with cumulative losses of more than $10 billion. This might be small fry compared to the bailout bucks being passed around the world after the recent financial crisis, but it does raise questions about what motivates investors to fly in such hazardous skies. Like moths to a flame, the savviest of businessmen can’t seem to resist the lure of high-altitude cash incineration.

Indian skies are especially smokey right now. Just look. Not a single day passes without new revelations of crew misbehaviour, shoddy management, crippling strikes, sharp losses, lease liabilities, fleet fumbles and jettisoned common sense. And little ever seems to change.

According to the data from Iata, the global airline association, the world’s aviation industry in 2009 will suffer losses of $11 billion worldwide, with India accounting for $2 billion. This is a huge amount of red ink, considering that Indian air traffic is only 2 per cent of the world’s total. But even Iata’s figure is likely to be an underestimate. Independent calculations reckon that by the end of the current fiscal year, the combined operating losses of all air carriers in India could be Rs 15,000 crore. At this rate, a crash landing is not far, with government ineptitude and private sector hubris being the main culprits.

It is as if once in the air, the airline honchos forgot that gravity ever existed; alas, you can fool people (at least some of them, some of the time), but not the laws of nature. That smartly turned out Kingfisher stewardess in the flaming red dress, that newly minted Airbus in Indigo colours landing at a gleaming private airport in Bangalore, that Dom Perignon served on the Brussels flight by Jet Airways—were these only fleeting glimpses from a dream sequence brought about by fevered minds?

The industry’s orgy of expansion began back in 2006, when, like the stockmarket indices, airlines began to believe that they were headed up, up and away. That no-frill airlines were thought to be the hot new business model, and that ‘common man aviation’ had gripped the imagination of policymakers—remember Air Deccan’s touching ad about the farmer’s first flight?—added to the enthusiasm. There was something populist in it, and this, being non-elitist, was to be commended by all well-meaning folk. Roti, kapda, makaan aur udaan was not such a fanciful formulation any longer. Or so it seemed at the time.

But of course it was elitist. Aviation always is. It’s an industry that depends on the use of massive public resources—air space and ground infrastructure—that are in naturally limited supply, and can logically accommodate only so many carriers and passengers, no matter what economy-of-scale figures you talk of. The revolution of flying farmers, let’s face it, was just rhetoric.

The aam aadmi carrier Air Deccan bled itself motionless, and was acquired by the flashiest of them all, Kingfisher, a designer carrier of sorts. In a burst of exuberance, it ordered Airbus A-380 Super Jumbos (yes, those planes with private cabins), while offering personal TV screens for the inflight amusement of all passengers, even in what has been described by a Union minister as ‘cattle class’ (economy, as the terminology goes). Kingfisher’s losses in 2008-09 swelled 58 per cent to Rs 1,600 crore. The carrier has been in trouble for non-payment of fuel bills, and earlier this year, its chief Vijay Mallya had to pledge almost 80 per cent of his liquor business holdings as a guarantee to his airline’s lenders (IDFC, IL&FS, Citibank and ICICI Bank among them). So much for taking every new plane for a spin around the holy hill town of Tirupati. Clearly, he needs more help—perhaps an easing of foreign investment restrictions in the domestic aviation sector.

Kingfisher’s arch rival Jet Airways was allowed to ply foreign routes on account of being an older player, and did so with gusto. Jet also had help—in the form of a hobbled Air India. According to aviation insiders, the state-owned carrier’s new planes meant for foreign routes were somehow left idle (fully paid for and shelling out parking fees), while Jet went about pinning the world with its destination flags on the map. Yet, Jet’s hurried expansion of overseas operations—with Brussels as a hub—left it badly bruised. It recorded losses of Rs 961 crore in 2008-09.

“In hindsight, there was certainly too much growth too soon,” says Dinesh Keskar, president of Boeing in India, “After all, in 2005 India had a total of 125 aircraft and had placed orders for almost 400 from international suppliers. And this was done almost at one go, so everyone did assume that the good times are here to stay. No one could have predicted the see-saw in oil prices, even less the global economic slump—so, to that extent, the airlines did expand too much too fast.”

A spokesperson for Jet has this explanation: “Corporate traffic has witnessed a slowdown, companies are reducing their travel requirements and are using other alternatives to transact business. Business class traffic has also shown a decline as compared to the previous year. Airlines are suffering in an overcapacity scenario and offering low fares, which has led to a decline in average yields. The domestic market, which had shown a decline of around 10 per cent last fiscal year, is still showing signs of a slowdown, though June 2009 saw an increase in passengers carried by around 6 per cent.”

Air India, or course, remains in a Maharaja class of its own. With losses to the tune of Rs 6,000 crore and held hostage by its pilots, this airline’s running has been reduced to a shameful farce. It rode the same wave of over-excitement in fleet expansion, placing orders left, right and centre. And then some. Planes in the industry are routinely taken and given on lease agreements with others. But Air India’s leases, it turns out, were blatantly give-away contracts, designed to serve the interests of external parties at the airline’s cost. This is a scandal, and Civil Aviation Minister Praful Patel has much to answer for on this account. This is taxpayers’ money that has been thrown away. Now, Air India cannot take possession of the new planes it ordered, and has meekly offered to rent them out in a market suffering over-capacity. Who pays for all this? The Government. Which means you, the taxpayer, eventually.

To add insult to injury, the airline wants a $750 million bailout without any change in its operating structure. The chorus in favour of privatising Air India has gone up several decibels as a result, the latest mid-air fist fight involving its pilots being the latest case in point. “The sooner the Government exits this airline, the better,” says Vishwas Udgirkar, executive director, PricewaterhouseCoopers, “The aims of the merger between Air India and Indian Airlines have not been realised. Things have not changed even after corporatisation. It is still run as a government department, and till that continues, the airline will have trouble.”

There are, of course, academic arguments in favour of the state retaining a presence in the sector. Its use of scarce public resources means it cannot act as a proper free market that anyone can freely enter, which in turn spells an oligopoly of fliers who could easily gang up as a private cartel to make monopoly profits—in the absence of a large player answerable to a larger set of stakeholders (say, the people of India). This applies to cellphone services as much as aviation. But telecom makes money. Aviation loses it. There’s a difference. The people of India should decide whether the money would be better spent elsewhere. Why throw good money after bad?

Aviation, unlike markets for colas and shampoos, is a heavily regulated one because of its peculiarities. This means one cannot absolve policymakers for any disaster that afflicts the entire industry. And the wreckage is all over the industry, with no carrier spared. Some people assume that firms like Spice Jet, GoAir and Indigo will survive because these are no-frill carriers that offer cheap fares, and cheap services sell well in downturns. This analysis is naive. It ignores the cost aspect of aviation, and on costs, the differences between airlines are minimal. The meal you forgo on a cheap airline does not save much money for it. The planes, airport charges, parking fees, aviation turbine fuel, pilot salaries and maintenance infrastructure form the bulk of costs. These are roughly the same for all airlines, give or take a wetwipe.

Yes, cost cutting is possible. This would involve ridding airlines of their flab—needless employees, various forms of waste, poor sourcing, inventory pile-ups of consumables, and so on. But except in the case of the overstaffed Air India, it is not clear how much slashing can be done on, say, staff size. When Kingfisher and Jet tried laying employees off, both those serving cabin passengers and those in the cockpit, there was such a protest that they quickly backtracked. At one point, Jet’s feisty owner Naresh Goyal even called his striking pilots “terrorists”, but it was he who had to blink in his standoff with them. The same concession was made by Praful Patel, who once spoke of heads needing to roll, in the case of Air India. Onlookers watched the whole episode in dismay. “The strikes by the Jet and Air India staff have certainly had a negative impact on the travel and tourism industry,” says Subhash Goyal, chairman of Stic Travels and president of the Confederation of Indian Tourism Professionals, “It is of paramount importance that the airline industry gets its act to gather for a sustainable revival in the tourism business.”

There is some relief the Government can offer airlines. By one estimate, turbine fuel in India costs some 15 per cent more when flying abroad and a criminal 70 per cent more when flying within India, in comparison with prices abroad. The fuel is burdened with very high taxes in India, and this makes flying extra expensive. Short-haul flights are penalised this way, since taxiing along the ground and taking off consume the bulk of fuel (cruising airborne is cheap). The high costs don’t just end there. Indian parking fees for aircraft are almost 10 percent higher than international benchmarks. “The fact is that the structural flaws that inhibit the growth of air traffic in India have not been looked into,” says Rajeev Bhargava, executive director, Air India, “The tax structures are very high compared to global benchmarks. The economics of short duration flights is completely unfavourable in the domestic sector, and hub-and-spoke logistics have been almost non-existent in India.” In other words, an aviation industry revival is not just about an economic upturn, as many assume. The whole sector needs a good, hard rethink.

Admittedly, there are no easy answers to all this. However, here’s a check list—in the spirit of what a pilot undertakes once in the cockpit (unpadded, one might add):

First, let professionals run Air India. The Government cannot run it. Selling a substantial stake in it to private investors could result in a win-win arrangement by which it is taken over operationally, with the Government retaining the requisite veto power needed to defuse any cartel crisis that may arise in the sector.

Second, all airlines must rationalise their fleets pronto. If cancellation fees on orders must be paid, so be it. Conserving cash is critical.

Third, state governments must cut turbine fuel taxes. Maharashtra did this recently at all airports except Mumbai, flying to which is mandatory from a market point of view. Using taxes as an incentive tool is absurd. It defies the equity canon of taxation, and does nothing for aviation in India.

Fourth, help the economy bounce back. This calls for sensible decisions all around, not irrational exuberance like the last time round.

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