Short-changing the Maharaja

Air India, described rather unfairly in the Economic Survey 2016–17 as a “perennially unprofitable public sector airline,” is going to be privatised. The cabinet committee’s “in-principle” approval for privatising Air India came soon after NITI Aayog’s recommendation and is typical of this government’s mode of functioning: hasty decisions taken without consulting stakeholders. Air India’s unions have threatened “industrial unrest.”

The national carrier is one among other airlines that were struggling, and is still undergoing a 10-year rehabilitation package that started in 2012. It posted faster-than-anticipated operating profits and lower net losses in 2015–16—much before its recovery package was to begin bearing fruit—while its low-cost subsidiary Air India Express posted profits. Both have reportedly done even better in 2016–17. Air India’s passenger load factor (or its ability to fill seat capacity), a key indicator of airline performance, has improved steadily over the last five years. The Indian civil aviation sector at large also reported positive results the same year, after a decade of difficulty. With steady passenger growth, it is expected to be the third largest civil aviation market by the end of the decade. There is optimism. Forecasts expect the number of annual domestic passengers alone to reach 100 million by next year. Clearly, the future of civil aviation in India is far brighter than in other parts of the world. It is little wonder then that the foreign direct investment (FDI) limits for civil aviation have been further relaxed, allowing 100% FDI in domestic airlines. Given these developments, in deciding to privatise the Maharaja now, overlooking its ongoing recovery, the government, in its attempt to appear “pro-reform”, is short-changing the national carrier.

The government would have us believe that this decision was inevitable given Air India’s “poor financial health” and “mismanagement.” However, this decision is ideological and will only benefit some private airlines and is definitely not in the interest of either Air India or its staff. It could also prove detrimental for the sector and for consumers as well.

Air India is not the only airline that was doing badly earlier, as we are led to believe. Private airlines too have had difficulty navigating India’s civil aviation sector (many more than just Kingfisher Airlines). Several airlines began operations after the sector was opened up post liberalisation. Of these, some 23 closed or merged with others but the latter eventually shut down, or have ceased operations. Many of the airlines that continued to operate have reported losses over the past decade. Until the drop in global crude oil prices, the sector faced difficulties due to relatively higher aviation turbine fuel costs in India, excess capacity, and a limited number of high-traffic routes to vie for.

The idea that Air India has always been unprofitable, and will never be profitable, and that this is a result of inefficient management, is an exaggeration. This impression—the stereotype of public sector enterprises running on “taxpayers’ money”—has been given credence on the basis of the airline’s poor financial performance. The last decade and a half has seen the controversial purchase of 111 aircrafts for the national carriers that is still under investigation, as is the badly planned and executed merger in 2007 of Air India with Indian Airlines (the state-owned carrier that mainly serviced domestic passengers in the past). These two government-led decisions were the primary causes of the merged entity’s disproportionately high debt.

In any case, the government will have to write off at least a part of Air India’s debt before its possible sale. Some of its debt could be addressed through asset sales and restructured loans. This could be done without privatisation since the operational efficiency of Air India is already improving. Surely, Air India, a public sector enterprise, must be given the opportunity to service its debt, one that is not denied to the private sector that owes much larger amounts to public banks. All this must be done even as Air India continues to work towards addressing some of its serious shortcomings. A part of its staffing problem has already been addressed, but much needs to be achieved on service quality and reliable delivery. The national carrier must invest in its staff to deliver high quality services efficiently.

The civil aviation market in India, like in many parts of the world, is oligopolistic, with a few firms controlling large market shares. Forcing the exit or merger of an established state-run airline—with the second or third largest market share by different indicators, which has 31% of the planes in the sector and prime slots at airports worldwide—will only aid in the undesirable concentration of market power with a few already large private airlines, and will prove anti-competitive. If anything, a public sector enterprise of this size in an oligopolistic sector is not only desirable, but essential.

Instead of indulging in virulent criticism of the Maharaja, the government must allow the recovery package to bear fruit, and must not privatise in haste. All signals—fuel prices and market conditions included—suggest that Air India will prove to be a profitable venture for the government, like it used to be earlier.