The crisis in the airline industry in India seems insurmountable only because the government has been delaying decisions on the industry for years.
The various lobbies working at cross purposes within the industry are probably keeping decision-making at bay. When it was just Air India in deep trouble, experts, and the industry, would recommend the privatisation of Air India as though it was the magic wand that would get the airline back on its feet again.
But now it is Kingfisher, a once shining icon of what a private airline could be, that is in deeper trouble as even the banks are unwilling to lend it money. It had the wrong business model and was allegedly totally mismanaged.
Much of its debts were due to the woolly-headed decision to take over the ailing and debt-ridden Air Deccan, which it once called a “flying Udipi restaurant”. But while Kingfisher’s problems are unique, all the private airlines, with the exception of one, are making losses. What is strange about the situation is that these loss-makers are still buying aircraft in defiance of all logic and good business sense.
They are expected to make a record loss of $2.5 billion to $3 billion for the year 2011-2012. According to one report, the airline sector needs an infusion of $2.5 billion to keep it from going belly up. Where is this money to come from?
The government has been dilly-dallying for the last 15 years on deciding whether foreign direct investment should be allowed only because on both occasions powerful lobbies scuttled it as they did not want competition.
Tata chairman Ratan Tata has often mentioned how his proposed venture with Singapore Airlines was scuttled. And now FDI is again on the agenda and the same lobbies are working hard to scuttle it. Kingfisher says it has three parties willing to invest but they are wary as there is no stable policy in place for the airline sector.
The situation is very complex. There are, meanwhile, a few things that the government and the industry can do to mitigate the hardships that airlines are facing. One is to reduce sales tax on ATF immediately as it has made the fuel the costliest in the world. For state governments, it is huge revenue for doing nothing.
If ATF is allowed to be brought in as declared goods, it attracts just eight per cent sales tax and would be a huge saving.
Fares today are below costs and this is one of the factors killing the airlines that can be resolved by the industry itself. Airport charges after privatisation have become relatively high — Delhi airport charges are said to be the highest in the world. These factors, if dealt with, can mitigate some losses.