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August 14, 1998


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Tata airline may take off

No other project in recent Indian history has been 'on the verge of going through' as often as the Tata airline. The Tatas first suggested an airline when Ghulam Nabi Azad was minister for civil aviation. Azad delayed his consent arguing that there was a capacity constraint. Then, during the H D Deve Gowda government, aviation minister C M Ibrahim announced a new policy that threw out the original Tata-Singapore Airlines concept. Deve Gowda's successor Inder Kumar Gujal was in favour of a restructured Tata airline as was Ibrahim's new minister of state, Jayanthi Natarajan. But even then, the project failed to get approval.

Early in the life of the Bharatiya Janata Party-led coalition government, the Foreign Investment Promotion Board cleared the airline without a reference from the civil aviation ministry. An angered ministry -- head by Ananth Kumar -- took the line that the FIPB had no business to clear the proposal without a reference from it. Civil Aviation Secretary M K Kaw, who was seen as a fervent advocate of the Tata proposal, paid the price and was transferred within days.

But now, the project has gathered new steam. On June 17, Tata Industries' Eric Vaz wrote to the FIPB to say that the airline now conformed to every guideline. On July 6, Vaz wrote again providing further details and arguing that the project was now entirely in consonance with the guidelines issued in Ibrahim's day. The FIPB had tentatively scheduled a meeting on August 8 to discuss the proposal. The date has now been deferred to August 22.

Even if this meeting is delayed, as it might be, there is a broad consensus within the government that the project will be approved within the next month or so. Prime Minister Atal Bihari Vajpayee is believed to have indicated as much to his aides. And both Finance Minister Yashwant Sinha and Home Minister Lal Kishinchand Advani are backing the proposal.

Barring a last-minute hitch, it now seems that the proposal will go through. One reason why the FIPB was due to take up the application on August 8 was because Parliament adjourns on August 5. For reasons that no one can fully explain, the Tata airline has managed to unite MPs from every single party, all of whom insist that the application must be rejected. Moreover, Union Civil Aviation Minister Ananth Kumar and his civil servants are said to be opposed to this scheme.

Significantly, even Jayanthi Natarajan, who backed the project as minister of state for civil aviation, has now signed a memorandum (along with 30 other MPs) opposing the airline. Natarajan says that she still has an open mind on a Tata airline but was angered by the manner in which the civil aviation ministry was ignored and the matter taken directly to the FIPB.

To understand why the proposal evokes such strong emotions on both sides, one needs to consider its evolution. Originally, the airline was to be an equity partnership between the Tatas and Singapore Airlines. Air-India objected strongly to such an arrangement because it feared unfair competition.

Air-India's argument was that Singapore Airlines already had 22 flights from India to Singapore. If it was allowed to run a domestic airline then it would operate on what the airline business calls the hub-and-spoke principle. That is, it would use the domestic airline to feed its international services. For instance, a person intending to fly from say, Bangalore to London would be flown by Tata-Singapore to Madras for virtually free so that he could catch a convenient connection to Singapore and board a Singapore Airlines flight to London. It wasn't hard to see how Air-India would be affected.

But because hub-and-spoke is a relatively complex concept, the debate was conducted in terms of whether other countries allowed foreign airlines operate domestic services. The Tatas provided examples of such countries.

Air-India disputed these instances and said that most countries were reluctant to agree to such an arrangement.

One fallout of the debate came at a meeting when then foreign minister Inder Kumar Gujral claimed that China allowed foreign airlines to operate domestically.

''Sir, that's simply not true,'' countered then civil aviation secretary Yogesh Chandra. Gujral said nothing then, but almost his first action on taking over as prime minister was to consign the unfortunate Chandra to the ministry of animal husbandry as a punishment for contradicting him. In his place came Kaw who aggressively supported the project -- till Ananth Kumar packed him off.

While the issue of whether other countries allowed foreign airlines to operate domestically remained confused (the consensus now is that yes, a few countries do allow this but most don't), the Tatas recognised that they were skating on thin ice.

Bowing to the hub-and-spoke argument, they agreed to drop Singapore Airlines as an equity partner. Instead, they re-submitted their proposal arguing that what had once been Tata-Singapore was now simply a Tata airline.

But is it really a Tata airline? On this question, some opposition to the project has been based. Critics of Tata-Singapore say that it is almost exactly the same project which has been cleverly re-written to get around the government's objections.

To illustrate their point, the critics say that the Singapore Investment Corporation will own half of all the non-Tata shares. Moreover, the Tatas have also conceded that they will enter into a technical services agreement with Singapore Airlines. According to the critics, this demonstrates that the old Tata-Singapore project is alive and well, it has only been disguised to win government approval. Therefore, all the old objections stand.

Nonsense, say the Tatas. The policy only says that a foreign airline cannot own equity -- directly or indirectly -- in a domestic airline. For a Singapore government corporation to own shares in a Tata airlines is perfectly legitimate. And as for the technical services agreement, that only relates to technical collaboration, not to management.

The aviation ministry has yet to say whether it is convinced by this explanation. Off the record, civil servants say that important questions still have to be answered.

The Tatas have not yet provided full details of their foreign shareholders. They have said that these are likely to be AIG, an insurance company, and the Singapore Investment Corporation. On July 6, the Tatas wrote to the ministry to say that AIG and the SIC had ''indicated an in-principle interest to review the project once suitable government approvals were in place. Further discussions with them and other FIIs can only be undertaken once suitable approvals are received''.

According to the ministry, this is putting the cart before the horse. The Tatas should first provide a list of investors and then get government approval. Instead, they want to do the opposite.

The key question for hub-and-spoke relates to how the Tata airline will be run. It is no secret that the Tatas have no current expertise in the field of aviation. Will they be able to tell whether Singapore is running a hub-and-spoke operation? Will the technical collaboration mean that the Singapore Airlines executives will draw up the time-table, crucial to the operation of hub-and-spoke?

The Tatas have retorted that these fears are groundless. But the ministry says that it is not convinced because of two reasons. One: the Tatas have not yet submitted the technical services agreement between Tata Industries and Singapore Airlines. And two: running an airline does not require particularly specialised expertise that is not available in India. Why do the Tatas need Singapore Airlines at all?

Why should Singapore persist with the proposal even after it has been told that the airline will not get equity? There is very little money in running private airlines in India. On the other hand, Singapore is a one-city country.

Singapore Airlines has reached saturation point. The Asian crisis means that there is a drop in transit traffic from, say, Bangkok or Kuala Lumpur. Could it be that Singapore needs hub-and-spoke passengers from India to keep its international operations going?

The Tatas say that these objections are worse than groundless. They are motivated. Sections of the ministry are determined to stop the airline and will use any objection to do so. Even though the proposal has been restructured, the old Tata-Singapore arguments are still being hurled at them. As to why they need Singapore, that's easy. The Tatas want to run an airline that is world-class. To do that, they need a foreign collaborator.

If the Tatas are right, then why should the ministry be so determined to prevent the airline from going ahead? The likely answer is that it is concerned about the impact on Indian Airlines which has only just turned around.

Over the last two years, the aviation market has failed to grow according to projections. Even the most successful of the private airlines -- Jet Airways -- operates on a 65 per cent seat factor.

That is to say that nearly one-third of its seats are always empty (except on some trunk routes). Indian Airlines is not as successful as Jet and much of its turnaround has been based on higher fares. (Fares are scheduled to go up again this month).

Should another operator enter the market, Indian Airlines' market share is certain to go down -- the new airline will draw its market share from the two existing majors (Jet and Indian Airlines), at least on the trunk routes. When that happens, Indian Airlines profits will disappear -- these profits are earned only on the trunk routes.

For the ministry, this poses enormous problems. It has tried hard to make Indian Airlines -- with assets of Rs 50 billion and 24,000 employees -- economically viable. The solution propounded in Yashwant Sinha's Budget this year was to privatise the airline by offering shares to the public. This public offering was deferred for 24 months to allow the airline to show a profit, so that the shares could be reasonably priced.

The ministry fears that the entry of another major player will destroy Indian Airlines' profit projections and therefore will destroy the plan to go public. ''If you are talking capitalism,'' says one bureaucrat, ''then what is better: privatising a nationalised industry or destroying that privatisation to please a large industrial house?''

These arguments may or may not be convincing. But the industry fears that it might be fighting a losing battle. The Tata project is now being supported by the finance ministry on an unusual ground.

The ministry says that India's global standing may depend on the Tata airline. Among the investors is AIG, the American-dominated insurance company which is represented in India by Frank Wisner, the well-connected former US ambassador to Delhi. North Block says that it is grateful to Wisner for bringing US investment to India at a time when his government is imposing sanctions against the country. To turn down the offer would be to turn away Americans who are willing to defy their government's policies.

Moreover, the finance ministry also believes that its own bonds will not be subscribed by foreigners who see India as being an old-style protectionist economy that is determined to preserve Indian Airlines' profitability.

The argument was all very well under the Air Corporation Act (under this Act, both the state-owned airlines were given monopoly status). But this was repealed in 1994, and both the airlines are now governed by the Aircraft Act -- just like any other private airline. ''So now there is no law whereby Indian Airlines can claim preferential treatment,'' says a lobbyist for Tata. ''At this point, no government policy can favour one airline, even if it is state-owned. It is against the law to say you are discriminating against one airline just to protect Indian Airlines,'' he added, and then laughed saying, ''besides, we all know who they are trying to protect.''

And then, there are the usual free market arguments. Of course a new airline will hurt the existing players. But is that the government's problem? Surely, liberalisation means that the government should not interfere with, or stall any project which would give Indian consumers a better option. If there are losers in the process, well, then that's just too bad -- that's what the free market is about.

Samajwadi Party general secretary Amar Singh however disagrees. According to him, one of the victims of this so-called free market is the government-owned Indian Airlines. ''I am against the mushroom growth of an airline at the expense of Indian Airlines. This could be either Jet Airways or Tata Airlines,'' he said.

According to him, a private airline would never fulfil Indian Airlines' social obligations, such as rescuing Indians who were stranded in Kuwait. Which is why he feels that any threat to the government-owned Indian Airlines should be opposed. And since it is too late to do anything about Jet Airways, Singh says he is venting his spleen on Tata Airlines.

In fact, last fortnight, a delegation of 30 MPs met the PM and voiced this concern. The MPs crossed all party lines and included Ghulam Nabi Azad and P J Kurien (the Congress), Yerran Naidu (the Telugu Desam Party), Gurudas Dasgupta (the Left) and C M Ibrahim (the Janata Dal).

The Tatas, however, are now used to this kind of backdoor opposition to the project. Once they heard that the project might be cleared, its media managers swung into action and prepared a question-answer media release entitled: Myths and Facts on Tata Airlines.

Interestingly, the media release does not mince any words about its intended target.

A hysterical overreaction? Not really, when you consider all that Ratan Tata had to go through just because he wanted to give Jet's Naresh Goel some competition. But, argue industry-watchers, Goel has cause to worry. ''The first thing the Tatas will do is to tie up with other players in the field, such as Sahara, and work against Jet,'' points out a former bureaucrat from the civil aviation ministry.

But as Civil Aviation Minister Ananth Kumar told Sunday newsmagazine, the proposal is still under examination. And that could mean just about anything: will the airline be stalled once again on some new technical grounds? Or does it mean that the Tata has finally won what must be the bitterest battle in the history of Indian aviation?

Kind courtesy: Sunday

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