Wednesday, Feb 19, 2020 | Last Update : 01:02 PM IST

Maharajah can rule, given a fair chance

Manish Tewari is a lawyer and a former Union minister. The views expressed are personal. Twitter handle @manishtewari
Published : Oct 27, 2019, 12:14 am IST
Updated : Oct 27, 2019, 4:31 am IST

The sell-off effort was revived again by the NDA/BJP government in 2017 but found no takers

Airlines pay several charges to airport operators, both private airports and Airport Authority of India-operated airports, for landing, parking, route navigation and royalty.  (Representational image)
 Airlines pay several charges to airport operators, both private airports and Airport Authority of India-operated airports, for landing, parking, route navigation and royalty. (Representational image)

India’s flag carrier, Air India, has long been vilified as the poster child of what ails India’s public sector undertakings. For the last 20 years, government after government has mulled over disinvestment. The United Front Government in 1997 and then two NDA governments from 1998 to 2004 attempted to sell Air India. However, the United Progressive Alliance government for 10 long years tried to revive the airline through financial infusions and a merger between Air India and Indian Airlines that failed to get off the ground.

The sell-off effort was revived again by the NDA/BJP government in 2017 but found no takers. Once again the current government is in the process of formulating an Expression of Interest to find a possible suitor. However, it is erroneous to view Air India from the prism of an ailing public sector enterprise in India. In fact, it should be seen as symptomatic of the larger distress in the aviation sector in India that warrants institutional reform. This malaise in the aviation sector has affected public and private players alike.

The irony is that over the last four years, India’s aviation market has grown at a yearly average rate of 20 per cent, among the fastest in the world. Despite this, all major airline players are in dire financial straits.

A product of India’s “open sky” policy introduced in the early 1990s, Jet Airways, India’s largest private airline at one time, is the most recent among 10 privately-promoted airlines that have collapsed in less than 30 years. Other carriers that have suspended operations include the East-West Airlines, Damania Airways, Sahara Airlines, ModiLuft, Air Deccan and Kingfisher. The last one still has not paid its employees. Together, these airlines left unrecovered dues to the tune of Rs 100,000 crores before going belly up. There is no empirical evidence that suggests that the private sector can run an airline better.

 One of the key determinants of an airline’s success or failure is the price of aviation turbine fuel. Its cost accounts for roughly 40 per cent of an airline’s operating costs. High taxes on aviation turbine fuel in India — one of the highest in the world — make Indian carriers less competitive against global players.

Airlines pay several charges to airport operators, both private airports and Airport Authority of India-operated airports, for landing, parking, route navigation and royalty. Other than these charges, airlines have to send their planes abroad due to lack of repair, maintenance, and overhaul facilities in India, but get no input credit for taxes paid abroad.

The regulatory framework in the aviation sector is hurting competitiveness of Indian carriers. Till 2016, the government had a self-defeating rule of 5/20, which meant an airline had to operate for five years in India and have 20 aircraft to be able to fly overseas. This constrained airlines revenue generation capacity. Airlines now need to operate only 20 aircraft on local routes to start flying abroad. Further, the Centre allows 100 per cent Foreign Direct Investment (FDI) in airlines, but has strangely has capped it at 49 per cent if foreign carriers wants to invest in an Indian aviation company. Since aviation is a highly capital-intensive business, FDI curbs prevent it from acquiring new technology and best practices.

The Indian market expanded rapidly in the first decade of the 21st century after the launch of no-frills carriers such as SpiceJet, GoAir and Indigo. Low cost carriers entering the market disrupted business models of full-service players such as Jet and Air India, eating into their market share. With a rapidly changing business model in the aviation sector, along with severe regulatory constraints that hamper the competitiveness of Indian carriers, it’s not surprising that not only Air India, no airline is doing well in India.

A prudent analysis in fact shows that Air India is actually doing better than most. In fact, it is already on a fast recovery track. A junior civil aviation minister informed the Lok Sabha that Air India made an operating profit of Rs 105 crore and a net loss after tax of Rs 3,836.77 crore in the 2015-16 fiscal. Air India’s operating profit is expected to swell to `700-800 crores in fiscal 2019-20. With proper policy support from the government, the Maharajah is capable of emerging as India’s number one carrier again within the next five years.

If Air India is shuttered, the world’s fastest growing aviation market will just have a single full-service carrier that is also a collaboration between Singapore Airlines Ltd and the Tata Group. Incidentally, it is making losses, too. Whether government-owned or private-owned is not the issue, moot is a comprehensive overhaul of the regulatory framework in this sector, a restructuring of Air India’s operations and a redefining of its market position.

If the government has to write off Air India’s debt before making it attractive for disinvestment, why not absorb the debt and restructure the airline? Air India has prime real estate all over the world, bilateral rights, prominent parking slots at most international airports, fifth freedom rights in some cases and profitable subsidiary companies. The whole package has an enterprise value over five lakh crores if properly valued and not the 20,000 odd crores or even much less that the government wants to hawk it off at to some favoured oligarch.  That would be the scam of the century and no minister in charge or Group of Ministers would ever be able to live it down.

The government has a pitiable track record of correctly valuing public enterprises. It recently found out that IRCTC, which it valued at just over Rs 5,160 crores might actually be worth twice that amount after drawing an oversubscription of 112 times the offer of Rs 645 crores. It’s making a similar error with Air India. Therefore, the government must rethink its decision to sell the Maharajah. A wiser decision would be to appropriately value Air India, restructure the airline, reform policy and then give the airline a chance to turn profitable.

If the government wants to reduce its equity stake in Air India to even 26 per cent or less, a better way would be to divest the equity in the market and make it a shareholder-owned company driven by an independent board and liberated from the clutches of the civil aviation ministry completely. This is the new norm globally. The minister concerned has spent a lifetime in government service as a distinguished diplomat, probably flying Air India around the world. He must cast around for more innovative options than just a heavily discounted garage sale. Air India deserves better.

Tags: airlines, maharajah