Just as Air India was receiving a debt recast plan that defies all financial prudence, or indeed logic, the newspapers were filled with splashy advertisements commemorating the centenary of civil aviation in India. It is impossible not to reflect what a mess state intervention has made of the sector; constant capital infusions into the state-owned airline – which now wants to expedite its purchase of 27 Dreamliners from Boeing – have helped the other players down the road to bankruptcy. Yet some of them, too, are in denial. Kingfisher, which is cancelling flights left and right and is being deserted by its pilots, has succeeded (possibly with government help) in securing “interim funding” till it finds an equity partner. Kingfisher has become a substandard account, and the banks are naturally worried about the provisioning they may have to do if it becomes a non-performing asset. In Air India’s case, the banks were unwilling to convert some debt into equity.
The damage this bailout (not the first) will do to the aviation and banking sectors is no joke. Neither of the two loss-making airlines has a concrete turnaround plan. The financial relief gives Air India room to persist with its short-sighted low-fare strategy to hold on to its market share, largely responsible for the losses in the market. In the absence of timely service, friendly staff, or neat and clean aircraft, the state-owned airline has kept its fares rock bottom to get passengers. This has kept almost the entire industry in the red. A correction in airfares is required if the industry has to survive. In the last few days, ever since Kingfisher began to curtail flights, airfares have gone up 10 to 15 per cent. This will provide some respite to the other carriers. But the Directorate General of Civil Aviation wants to ensure that airlines do not take “undue” advantage of the situation and raise fares. This concern for the aam admi is misplaced. Airlines fly about 50 million people every year. A large number of these fly more than once; so the actual base of fliers is very small — the creamy layer. It is reasonable to assume that they can absorb any correction in airfares that restores the health of the industry. Looked at from the cost angle too, a rise in airfares seems to be the only solution left. Nowhere in the world, except Bangladesh, are taxes on jet fuel as high as in India. This makes flying aircraft an expensive proposition because jet fuel accounts for 50 per cent of the operational costs. So it’s reasonable to let the airlines raise fares. The civil aviation ministry should worry about the safety of the passengers and not fret when airlines raise fares in order to defray costs and stay afloat.
Kingfisher and Air India together have a market share of around 30 per cent. If the two airlines were to shut down, the market will become less crowded and more viable. Airplanes in India, on average, are only 75 per cent occupied, which means a quarter of their capacity remains unused. This needs to improve. However, by providing another financial bailout, the government and the banks will only end up prolonging the agony in the industry.