A government-engineered mess

The Indian airline industry is in panic mode. For the past few weeks, stray newspaper reports have been suggesting that the sector is staring at losses in thousands of crores. And the drama that unfolded yesterday confirms it. Jet and Kingfisher have come to an agreement wherein they will implement code sharing across their flights, rationalizing them in the process, and also share operational infrastructure. This effectively signifies an end to the competition between the two, at least in the immediate future (some reports even suggested the possibility of a merger, though that has been ruled out). There are people out there who deny that this is not cartelization. But an alliance of two airlines (previously four – don’t forget Sahara and Air Deccan) that controls 60% of the domestic market is nothing but a cartel. The deniers are worried about government action based on anti-trust laws (through the Monopolies and Restrictive Trade Practices Commission, and its new avatar the Competition Commission of India) – cartel is a damning word. But cartelization is hardly the problem here. Its the government, again.

India’s politicians and bureaucrats are evidence that Darwin’s theory of evolution is right – the rest of humanity has evolved, and these people have not. While socialism and the “welfare state” lie at the root of the problem, India’s aviation polices are the immediate cause of the sickness that plagues the industry. From the pigheaded policy that no foreign aviation company may hold a stake in any Indian airline (you are excluded because of your expertise), to the crippling taxes levied on ATF, to placing qualitative and quantitative restrictions on where and how airlines can fly (the so-called regional airlines, for example), to forcing private airlines to fly on non-remunerative routes through “route disbursal guidelines”, to limiting free competition in the airport business, the issues are endless. Which is what makes this ET editorial more intellectually dishonest than they usually are-

If the alliance works then it can certainly help the two airlines cut costs and obtain a more viable operating structure. However, since they together control nearly 60% of the market any such understanding runs the risk of being anti-consumer. It is a good case for the competition authority to look into.

Unfortunately, the competition commission is yet to formally get off the ground. The civil aviation authorities have, therefore, rightly decided to step in to examine the agreement among the two airlines. Any hint of collusion should be dealt with sternly.

Yesterday, Times Now had a fun debate on the mess, and I smiled along with Infosys’ TV Mohandas Pai, while the other participants were trying hard to make a case for and against a “government bailout” for the airline industry (a 5,000 crore rupee interest-free loan, according to some reports). The communists reiterated their brain-dead anti-capitalist ideology (they are right this time though; even a broken clock is right once every twelve hours); FICCI’s Amit Mitra said it was an infrastructure issue and government support in the form of “credit” was required; one more fellow, I forget his name, started an argument with the fellow from CPI, and even talked about how capitalist countries are prescribing socialist solutions; Pai too was in favor of the bailout, talked about the difference between “individual risk” and “systemic risk”, and said that nationalizing the airlines would be worse than bailing them out. He however correctly blamed the government for the whole mess. Basically, a fun debate, but an exercise in futility, as always.

You have to have the brains of a dodo to not realize the government’s hand in the whole mess. Yes, the airlines were aggressive in competing with each other, but in a free market, the outcome would have been completely different – industry lobbies would not be able to demand bailouts from a government that has no such power. In a free market, the punishment for bad business decisions is bankruptcy; in a “welfare state”, the reward is a taxpayer funded-bailout.

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Comments

  • Abhishek  On October 16, 2008 at 11:33 pm

    In the particular case though, airlines have been going through a bad patch all over the world, and not just because of regulation. The airline sector in the US is fairly unregulated but things are pretty bad here too.

    Ultimately mergers and consolidations are not that bad, they are a natural stage in any industry that is going through bad times. With fuel prices on the way up (though temporarily down currently) and fewer people travelling, there are simply too many inefficient players and some consolidation is necessary. I see the Jet-Kingfisher deal as a good sign, and hope that the government will keep its hands off!

  • you12  On October 16, 2008 at 11:34 pm

    All of them are back!

  • pr3rna  On October 16, 2008 at 11:38 pm

    How can the government misuse the taxpayers money? I was surprised to hear Amit Mitra defending the bail out package.
    Very well said- In a free market, the punishment for bad business decisions is bankruptcy; in a “welfare state”, the reward is a taxpayer funded-bailout.

  • Aristotle The Geek  On October 17, 2008 at 3:49 am

    Abhishek,
    As long as Praful Patel is there, nothing will happen. He has already given some kind of a ‘clean chit’ to the deal. Unless the sector is freed though, things are not going to improve. We need more airports – private ones. Smaller ones in the outskirts of major cities will automatically reduce costs – a model adopted by UK based low cost carriers.

    you12,
    The sacked employees? I think Oscar Fernandes must have threatened Naresh Goyal over labor laws.

    pr3rna,
    Its a daily affair – the misuse of taxpayer’s money. Everything from the fertilizer subsidy to the farm loan waiver to the subsidy on kerosene and diesel – someone is paying. Amit Mitra is related to FICCI; and I think both FICCI and CII have approached the government for some kind of assistance. Don’t know if its related to increased funding from banks or something else.

  • Pramod Biligiri  On October 18, 2008 at 1:11 am

    This Amit Mitra fellow is consistently that bad? How did he get to be the FICCI chairmain?

  • Aristotle The Geek  On October 18, 2008 at 1:41 am

    FICCI and CII are industry bodies – lobbies. Mitra might not be able to make his point on television – tv journalists and the common man won’t understand finance even if it hit them in the face, but he might be doing it well in talks with the government – bureaucrats. That’s why FICCI still has him on board, I think.

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