Dashed hopes of cheap air travel
Dr Ashwani Mahajan
Captain Gopi Nath, promoter of Air Deccan, the first low priced and low cost airlines, once said that his dream is that every Indian must travel by air, at least once in his lifetime. Though it will take some more time to fulfill his dream completely, but there is no doubt that air travel which was available only for a chosen few, due to its high cost, now is possible even by the 'common man' due to drastic reduction in the air fares, thanks to a host of private low cost airlines.
About 25 years ago, Delhi-Mumbai air fare used to be around 7,000, which has now come down to as low as Rs. 3,000 to 5,000. This has happened despite the fact that general price level in the country has gone several times up during these years. If we have a look at the statistics, there were hardly 1 crore 40 lakh air trips by individuals in 2000-01, which went up to 4 crore 60 lakh in 2010-11. Number of International travellers have also gone up from hardly 38.3 lakh to 1 crore 17 lakh during these years. Spread of air travel facility from a select group to the average person, has been a smooth one, thanks to fast growth of low cost—low priced private airlines. Today, there are several small and large aviation companies including Spice Jet, Indigo, Jet, Go Air, Kingfisher and several others. Some time back pioneer company in this sector Air Deccan and another company Sahara had sold off their operations to other companies.
Kingfisher crisis
These days Vijay Mallaya's aviation company Kingfisher is a topic of hot discussion, due to the financial crisis faced by the company. Kingfisher has not only pulled out of its air operations on most of its routes, sudden cancellation of its flight is bringing bad name to the company. Vijay Mallaya blames government policies for its crisis. Government sources are continuously trying to say that this sector is increasingly coming into red, aviation companies are facing severe financial crisis, and liquidity crunch is not only affecting healthy growth but also making the operations of these companies difficult.
Public sector aviation company Air India is already at the verge of bankruptcy and is even finding it difficult to pay salaries to its employees. Government has announced a huge bailout package of Rs. 30,000 crores to salvage this company from bad waters.
Government efforts to open FDI
Under open sky policy, government had already given permission for the entry of FDI up to 49 per cent. However, Indian civil aviation companies were not allowed to offload their shares to foreigners. Now when Indian companies are facing severe financial crisis, as they are not finding Indian buyers, are trying to impress upon the government allow them to sell up to 49 per cent to foreigners to save them from crisis. Government has also given sufficient indication that they are going to open this sector for 49 per cent FDI. Ailing Kingfisher has been waiting for this policy of the government for long.
If the foreigners were allowed to grab 49 per cent shares in these companies, managerial decisions of these companies would go into foreign hands. So far, our experience with such kind of policy has not been very encouraging. These foreign companies do not miss a chance to exploit consumers. When foreigners took control of ACC, a leading cement company, monopolisation in the market led to fleecing of consumers in terms of high prices. Similar is the experience in case of pharmaceutical sector, where after acquisition of Ranbaxy, Piramal and many other companies is causing havocs for the common man, as unreasonably high prices are being recorded in case of generic drugs. Similarly, if foreigners were allowed to take 49 per cent stake in the equity, foreign companies may gain control on Indian skies and start fleecing the consumers by charging high prices. With this possibilities of cheap air travel for the common man may get spoiled.
According to a study, fifty to sixty per cent of air travellers may continue to travel, irrespective of the fares charged. The rest forty to fifty per cent are affected by the price and may have to give up air travelling, because of affordability issues. Monopoly firms, do not hesitate even to curb supplies to maximise profits. According to economic principles, monopoly firms actually are not concerned by production efficiencies and production at least costs. In fact, they generally produce at point of maximum profit and may even exercise price discrimination.
Faulty ATF pricing policy
General perception is that aviation companies are incurring losses due to their inefficiencies. Actually, the inefficiency may be a problem for some private airlines or public sector Air India. However, the major cause of airlines losses is faulty air turbine fuel (ATF) price policy of the government. Though rising crude price globally is causing ATF prices to go up globally, in India ATF prices have raised by 40 per cent as compared to hardly 30 per cent internationally. Petroleum companies have been given free hand to determine petro prices and government continues to impose 20 per cent to 29 per cent taxes on ATF. As a result, while average global ATF price is US $ 1028 per tonne, the same is sold at US $ 1560 in India. Same ATF is available for foreign airlines at US $ 1190 per tonne. Share of fuel in operational cost of airlines is hardly 25 to 30 per cent globally, where as it is 50 per cent in India. Instead of giving relief in taxes, government is promising to allow airlines to import ATF directly from abroad. But even if they are allowed to import, they may still have to pay import duties.
Not FDI – Right policy direction needed
In view of the ground realities with respect to the financial health of private airlines, it is imperative to cut down the operational cost of airlines, by bringing down the tax burden. A healthy growth of this sector is the need of the hour to fulfill the national desire to keep air travel within affordable limits.
(The writer can be contacted at ashwanimahajan@rediffmail.com)
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