Published in Swarajya on October 25th
http://swarajyamag.com/biz/excessive-government-interference-is-strangling-civil-aviation/
I view the performance of this government vis a vis the
economy in poor light for a variety of reasons. The argument that it is better
than the previous government certainly does have some truth to it but that
shouldn’t become an excuse for the non/under-performance of the current
government. One sector in which this government has performed disastrously is
the Aviation Sector. In this article, I seek to demonstrate how.
‘PM Modi concerned over predatory
pricing by airlines’; ‘PM Modi Wants Cheaper Airfares, Airlines to be told’.
Let us first look at what Predatory Pricing is --- it is one
of the many popular myths about Markets which propounds the view that certain
companies adopt a strategy of offering prices low enough to drive away
competitors (i.e. lower than average cost) creating monopolies. It along with
the other ‘evil’- price gouging; has very little economic logic to back it up.
[1]
The first of the above two headlines is from Aug 27
[2]
and the second came out on September 2
[3].
It took 6 days for the Prime Minister’s concern to shift from ‘Predatory
Pricing’ to wanting ‘Cheaper fares’!!
According to the
second news report, i.e. on Sept 2, the MoS of Civil Aviation Dr. Mahesh Sharma
said, "It is a competitive market that determines the pricing of air tickets
but the government of India, including the Prime Minister, is concerned about passing on the benefit to passengers;…..
Soon, we will have a meeting with airlines on predatory pricing." The benefit he is talking about is the reduced ATF prices- not
out of any cut in central ATF taxes but a result of a fall in the global crude
prices being passed on by Indian Oil Marketing Companies i.e. OMCs .
This isn’t the only time the Minister has revealed his lack
of understanding of economics. On the 27
th of June he had remarked
[4]
,“Predatory pricing by airlines is a big issue. A large section of the public
and even parliamentarians have raised the issue that airlines charge Rs
30,000-40,000 for a ticket when a passenger has to travel in some emergency.”
The fact that there is very little evidence to back up the
charge of ‘Predatory Pricing’ hasn’t stopped our ‘Consumer-protection
Associations’, politicians, and the pen-pushing bureaucrats from using it as an
excuse for price control and a more regulated sector. It appears that the only
‘pricing policy’ of this government vis-a vis aviation seems to be- Interfere
in Market Process erratically whilst following the dictum of maximum
government.
Going back in time a little, we come across detailed
suggestions from the Aviation Minister Ashok Gajapati Raju’s deputy MoS Dr.
Sharma on how this ‘Pricing Policy’ can be structured as
[5]
:
a. Setting of Price Ranges for Airfares;
b. DGCA assessment of fares during different seasons for fixing ‘appropriate’
price caps; and
c. Using Air India’s fares as the basis for pricing mechanisms and then cutting
Air India’s fares on select routes.
It is pertinent to note that although both Minister Raju and MoS Dr. Sharma
have advocated some form of pricing regulation, MoS Dr. Sharma seems to be the
one pushing for it rather vociferously. It is frightening to see a conservative
government being led by a Prime Minister who frequently used ‘Minimum
Government, Maximum Governance’ in his campaign, advocate such brazen
regulatory intervention into Aviation Markets!
Aviation Ministry’s Infighting –
Conflict within an organization isn’t good, especially so if
the organization makes decisions which affect millions of people. The Aviation
Ministry has been according to various news reports
[6]plagued
by infighting which might be the real reason behind the delay in
release of the draft Aviation Policy. The Civil Aviation Minister appears to
advocate less government intervention and has announced multiple times that the
disastrous 5/20 rule will be scrapped. His deputy who seems to be gunning for
his post- Dr. Mahesh Sharma does the exact opposite advocating institution of
price control mechanisms and other forms of government intervention for the
usual reasons, public benefit and air connectivity to backward areas.
Take the case of ‘Baggage Charges Incident’. Some no-frills
airlines had proposed to the Directorate General of Civil Aviation (DGCA)
that they would charge for Check in Baggage and also institute a Zero Baggage
Fare to enable light travellers to benefit from lower fares and at the same
time encourage such light travelling. The MoS Dr. Sharma directed the Aviation
Ministry on June 27th to disallow the same. The reason he gave was
laughable – ‘Such a move, if allowed to go ahead will be a dampener in air traffic
growth in India’. According to him, lower prices will lead to reduced
demand for air travel. Is it too much to expect the Minister of State for Civil
Aviation to know the Law of Demand and Supply? On July 1st, Minister
Raju contradicted his Junior Minister’s remarks saying -
‘Nothing is free, everything is paid for, whether it is your baggage or ticket
or things like that… Airlines at one point of time were considered elitist, now
it is not and there are multiple people who (travel by air)’. He later remarked
that this decision needs to left to the regulator.
This is not the only time such disputes and ‘Differences of
Opinion’ have occurred in the ministry -
the NCR Airport Issue , regulation of fares in the festive season and many
more.
Air India
Recently, Rohit Nandan’s successor as the CMD of Air India
was announced as Ashwani Lohani , a non IAS officer (Thank the Gods!!, after 12
years). The new CMD calls himself Mr. Turnaround and is reputed to have turned
around ITDC during the ABV years. Previously, Mr. Lohani has claimed that he
will turnaround Air India within a year, if given a chance
[7],
which is hard to believe. Air India had asked for a revision of the original
Turn Around Plan (TAP) under which the GoI had agreed to provide a 30,000 crore
infusion into Air India over a period of 10 years in a phased manner subject to
Air India achieving certain targets. SBI Caps which had prepared this
turnaround plan had brilliantly assumed crude @ $45 for the entire period of
the plan (It had made other brilliant assumptions
[8]).
One should rightly put the blame for that on the UPA government. The present
government though has tasked the same SBI Caps with making the revision to the
TAP and no matter how hard you try, the error this time is of our minimum
government.
One would think that they would have atleast put a stop to
the gravy train that Air India is to all sorts of powerful individuals – MPs,
Management of Air India, the employees, and our bureaucrats; but no, this too
continues in various forms. Our “Minimum Government “ continues to use Air
India as a Foreign Policy instrument (continuing a long standing tradition),
the latest instance of which was the announcement of non-stop flights to San
Francisco from New Delhi during the Prime Minister’s recent visit to the US.
This despite the fact that no viability study of the same has been conducted
and such foreign operations have been bleeding Air India dry by contributing to
almost 70% of the operational losses of Air India
[9]!
The Prime Minister funnily told the audience at the Facebook Townhall that his
4D’s include De-regulate (Dear Citizens of India, happy De-regulation!!). While
this de-regulation happens, Air India continues to be the poison pill of Indian
Aviation.
Green shoots of Progress-
The 5/20 rule.
The infamous 5/20 rule makes it compulsory for airlines to
have a minimum of 5 years of flying history and 20 aircraft to be able to fly
to overseas destinations. It is by its very nature anti-competitive as it
prevents new entrants from operating certain routes of established airlines,
thus lowering the prices. The only organizations which benefit from this rule
are the established airlines like Jet Airways and IndiGo which are afraid of
loss of margins due to increased competition in profitable international
routes.
I’m of the firm belief that the person who thought up this
rule should be given an award of some sort. Only a brilliant mind can think up
such innovative ways to screw the consumer.
The Minister of Civil Aviation Mr. Raju has repeatedly
announced that this rule would be repealed. He has been announcing the same for
almost 15 months and that’s about it. Though, no progress has been made on actually removing the rule.
Then we heard that the PM wanted the rule to go. Good News Finally?? Think
Again. The Ministry of Civil Aviation in its infinite wisdom is thinking of
‘replacing’ the rule
[10].
So we don’t know as of now how this issue will play out. But we still have to
commend the Prime Minister for atleast taking a pro-growth stand as he
reportedly said
[11]
- "If the rule is stifling the growth of our carriers, the rule should
completely be abolished and not replaced. What is the need to replace a rule
with something when the rule itself is not pro-growth,"
The Government needs to get out of
the way!
For Indian Aviation to soar, the
Government needs to take a relook at it’s policy of interference, high taxes,
continuing to fund poison pills, and creating ever monopolising rules for the
‘public benefit’. It has to realize that this is the exact same policy which
their predecessors tried and which has had disastrous consequences. It needs to
learn to accept that they can’t run, control, and extort Indian Aviation while
‘planning’ their way out of Air India’s financial abyss. It needs to ‘Get out
of the Way’ soon to achieve “Minimum Government” and de-regulation.
[1] For More on the same-
http://www.cato.org/publications/policy-analysis/myth-predatory-pricing
[2]
http://www.firstpost.com/business/pm-modis-concern-over-predatory-airfares-likely-cess-on-tickets-2410814.html