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Mindless deregulation disastrous for India
October 23, 2008
It wasn't a mere coincidence that Jet Airways [Get Quote], India's largest private airline, decided to sack as many as 1,900 employees exactly two days after announcing a resource-sharing 'alliance' with Kingfisher Airlines, the country's second biggest private carrier.
Both decisions have a common cause: growing overcapacity and mounting losses in civil aviation, leading to desperate efforts to cut costs by whatever means.
In the event, Jet Airways reversed its decision to retrench the workers, including 850 cabin crew, who had launched an agitation. But the first decision, clearly more important than the second, with far greater implications for the future of Indian civil aviation, still stands.
It will create a thoroughly undesirable monopoly, distorting the market and raising fares.
We'll never really know what impelled Jet's chairman Naresh Goyal to make the about-turn on sacking employees. He says his 'conscience' wouldn't permit the retrenchment and that he 'couldn't sleep' knowing he had destroyed so many livelihoods. Many of the pilots on the retrenchment list had shelled out Rs 40 lakh (Rs 4 million) to get flying licences while the cabin crew had paid Jet Rs 55,000 as 'security deposit'.
Mr Goyal is less known for his conscience than for his sharp business dealings. In all probability, what persuaded Mr Goyal is the pressure mounted on him by Civil Aviation Minister Praful Patel, Petroleum Minister Murli Deora and Maharashtra Navnirman Sena chief Raj Thackeray, and the fear of attracting public disapproval. All these gentlemen took credit for dissuading him.
The factor that probably weighed the most was middle class -- and media -- sympathy for the sacked cabin crew, which represents what might be called the glamour component of this white-collar workforce, all very middle class and ambitious.
The Indian elite shows very little compassion for far poorer workers, either of the blue-collar kind in the organised sector, or the more numerous unorganised labourers who regularly lose their livelihoods under the impact of globalisation and liberalisation. Air hostesses, however, are 'people like us'!
Meanwhile, Mr Patel has started a debate on how to rescue the airlines companies with public money -- as if they represented some worthy public cause. True, the industry's losses are mounting and are expected to total $1 billion (Rs 4,980 crore) on a turnover of $6 billion in 2007-08, and rise further to $2 billion next fiscal year. At this level, the losses will nearly equal the losses totted up by the aviation world's greatest loser, the United States, all of whose big airlines have long been deep in the red, not to speak of a host of smaller carriers.
Jet Airlines has posted losses of Rs 800 crore (Rs 8 billion) and Kingfisher a higher Rs 1,000 crore (Rs 10 billion). Even greater is Air India-Indian Airlines' combined loss of Rs 2,144 crore (Rs 21.44 billion) for which the government must take much of the blame for its repeated failure to order new aircraft.
In addition, the airlines owe the public oil companies more than Rs 2,000 crore (Rs 20 billion) in dues and another Rs 1,000 crore (Rs 10 billion) to the Airports Authority of India.
India's airlines, private carriers in particular, are in trouble for two reasons. First, they expanded furiously and recklessly in the past decade in efforts to grab as big a share of the market as rapidly as possible. Second, the government progressively deregulated the sector, jettisoning norms of prudence such as adequate capitalisation, and allowing carriers to set their own routes, flight schedules and time-slots.
This led to wild, unregulated competition and a 30 to 50 per cent overcapacity in aviation. But relying solely on their recent experience of growth, the carriers kept ordering more aircraft to retain market shares, thus aggravating the overcapacity problem and losing more money.
The airlines nurtured and spread the illusion that air travel would become affordable for 'the common man' through sheer expansion and economies of scale. The entry of no-frills low-cost carriers like Air Deccan five years ago strengthened this illusion. Many airlines set their fares deliberately low to draw passengers away from rail travel -- a form of predatory pricing. They forgot that economies of scale are relatively small in the aviation business, where fuel accounts for 40 per cent of operating costs.
Rail travel is inherently cheaper and ecologically vastly superior. (Airplanes leave a huge carbon footprint as they fly at high altitudes emitting greenhouse gases.) At any rate, given their low incomes, flying an airliner will remain a dream for most Indians.
At the peak of the ultra-low fare regime, only 3 per cent of the Indian population was flying! A significant proportion has now gone back to the railways, as was bound to happen.
By last year, under the impact of aggressive pricing and overcapacity, several airlines had become unviable. Jet bought out Sahara and Kingfisher acquired Deccan, then suffering a daily loss of Rs 1.5 crore (Rs 15 million).
Such anti-competitive mergers shouldn't have been allowed, but they sailed through. Then came this year's sharp rise in crude and aviation turbine fuel prices, which further squeezed profit margins. The airlines formed a tight cartel and decided to levy a minimum fare of Rs 2,800, mislabelled as 'fuel surcharge'. That ended the short-lived era of low-cost aviation, but not the industry's problems.
The core problems can be traced to a single cause -- mindless deregulation in Indian aviation fashioned after the US model. Paul Stephen Dempsey, an expert in aviation and the law at Canada's McGill University, has lucidly analysed this. He concludes that barely a decade after the Airline Deregulation Act of 1978 was implemented, the US airline industry lost all of the money it made since the Wright Brothers' inaugural fight in 1903.
After 150 bankruptcies and 50 mergers, the US now flies the developed world's 'oldest and most repainted fleet'. Of the 176 airlines to which deregulation gave birth, only one remains and that too is bankrupt. Deregulation has led to greater monopoly and concentration, with just four airlines controlling two-thirds of the US market.
Rather than lead to a reduction in fares, as laissez-faire economists had confidently forecast, deregulation actually led to a fare rise in real terms. The full fare has risen sharply, at more than double the pace of inflation, costs have escalated, and service has declined.
Social time worth billions of dollars has been lost because of highly time-consuming hub-and-spokes operations to which many airlines resorted to cut costs.
Not only has India failed to learn from the US experience. It continues to bank on the same deregulation model even after it has so manifestly failed on its own soil, as evidenced by the bankruptcies of ModiLuft, East-West Airlines and Damania Airways in the 1990s, and further confirmed by recent experience. All that Mr Patel wants to do is to stick to the model after giving generous Rs 5,000-crore (Rs 50 billion) bailout packages to the airlines industry, including reduced duties on fuel, deferred payment facilities and other undeserved concessions.
Evidently, Mr Patel sees himself as an industry promoter and representative, not a maker of rational policies or a regulator in the public interest. Worse, he supports the Jet-Kingfisher 'alliance' although it is obnoxiously anti-competitive. The alliance will control a huge 59 per cent of the aviation market, which is way, way higher than the 7 to 15 per cent market-share that usually attracts anti-monopoly and anti-trust action in most countries.
Of course, India is novel and unique in this regard. Under Dr Manmohan Singh's ideology-driven liberalisation, we defanged the Monopolies and Restrictive Trade Practices Commission, but have shown no will to appoint the promised Competition Commission. So monopolies thrive under 'free market' policies, distorting the market and creating havoc.
But our ruling elite continues to repose blind faith in neoliberal free-market ideas even as these get discredited in the developed capitalist countries because of their contribution to crises, instability, destruction of wealth, inequality, and undermining of social cohesion. Indeed, as the economics Nobel for Paul Krugman demonstrates, heterodox ideas questioning market fundamentalism have once again become respectable, and many conservatives now speak in favour of state ownership and strict regulation of banks, savings and loans, transportation, telecom, broadcasting, and oil and gas.
Many mainstream Western commentators are already declaring 'the end of conservative dominance' in economic and social policy-making, British Prime Minister Gordon Brown is calling for a new Bretton Woods conference to renew global economic institutions, and numerous governments are nationalising chunks of private banks and financial institutions.
However, many conservatives in India are in total denial of the crisis, or play down neoliberalism's loss of legitimacy. Instead of tighter capital controls, some want free capital account convertibility and greater reliance on highly speculative and tricky instruments such as Participatory Notes -- despite Sebi's decisions to the contrary only a year ago.
These people live in a time-warp and will inflict more pain and suffering upon us. The quicker we get them out of the warp, the better for all of us.
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