The Hindu Business Line : Naresh Chandra report — What is on horizon for national carriers?

The recommendations of the Naresh Chandra Committee on civil aviation expectedly plumped for root-and-branch reforms in the country's highly cosseted civil aviation sector, besides suggesting disinvestment in the national carriers.

WITH the National Democratic Alliance (NDA) cruising the penultimate year to the General Elections 2004, after convincingly wresting three of the four Assembly elections earlier this month, the Vajpayee Government is surely in a mood to show it means business by going ahead with economic reforms.

The Prime Minister, Mr Atal Bihari Vajpayee, himself set the tone by emphasising the need for pushing development and people-friendly policies. Viewed in the light of new zeal for action and performance, the recommendations of the Naresh Chandra Committee on civil aviation expectedly plumped for root-and-branch reforms in the country's highly cosseted civil aviation sector, besides suggesting disinvestment in the national carriers — Indian Airlines (IA) and Air-India (A-I).

The panel's recommendation to raise foreign equity limit in domestic airlines to 49 per cent from 40 per cent, all of which can be gleaned by foreign airlines after seeking permission of the Foreign Investment Promotion Board, is nothing dramatic. Two years ago, the Group of Ministers headed by the then Finance Minister, Mr Yashwant Sinha (now Eternal Affairs Minister), two years ago had favoured the same, and also that there should be no bar on foreign equity held by the foreign airlines.

But the then Civil Aviation Minister, Mr Sharad Yadav, did not endorse the proposal. Subsequently, in August 2002, the Report of the Steering Group of Foreign Direct Investment (FDI) under the chairmanship of Mr N. K. Singh, Member, Planning Commission, said the foreign equity cap on civil aviation should be raised to 49 per cent and foreign airlines allowed to invest within this cap. It said the 49 per cent limit represents below majority holding, unlike 40 per cent, which has no link to any other limit or rule. The Naresh Chandra Committee only dusted off these suggestions and repeated them with a 100 per cent foreign investment idea in helicopter services.

Only last year had the Government shelved the disinvestment proposals for both A-I and IA for various reasons. Though the process of disinvestment suffered a jolt, that the Naresh Chandra Committee favours privatisation of the national airlines even now bespeaks of the Government's desire to see that the process of disinvestment gets a renewed impetus.

But the Committee's view that the Government may consider private placement of the shares of the two airlines with domestic financial institutions (DFIs) and foreign institutional investors (FIIS) appears to be taking a conservative position, far removed from the ground reality.

Though these institutions can subsequently sell or transfer their shares to any strategic airline partner, the moot question is why should DFIs, most of which are already in the doldrums, purchase equity of IA or A-I? Aviation industry experts conversant with the operational results of the national carriers say that the net worth of IA today stands at minus-Rs 446 crore with its accumulated losses, including the current year's estimated loss of Rs 196 crore, at Rs 1,175 crore. A-I's position is unenviable in the sense that it has been the beneficiary of a code share arrangement that is delivering Rs 250 crore annually in unflown revenue.

A cognate issue pertains to the plan of the two airlines to purchase new aircraft. The IA Board approved on March 27, 2002 the proposal for acquisition of 43 aircraft comprising A 319, A 320 and A 321 from Airbus Industries during 2003-04 to 2007-08 at a net cost of Rs 10,089 crore.

The A-I Board approved on November 8 the proposal for acquisition of 10 medium capacity long-range (A 340-300) and 18 small capacity short-range (B 737-800) aircraft at an estimated cost of Rs 10,589 crore.

Most of the IA acquisitions will be for replacing its ageing 11 Boeing 737-200s and five Airbus A 300s and relieving the eight dry-leased A 320s. In the case of A-I, the 10 A 340-300 are supposed to replace the leased Airbus A 310s of which it has 11 and four of its more than two-decade-old Boeing 747-200s, which spend more time on the ground than in the sky.

The crucial point is that if the privatisation scheme is approved, the purchase of new aircraft may have to be put off as the private partner or consortium would also like to exert its choice in the purchase of aircraft. What is also particularly noteworthy is that if the limited open sky policy for Asean carriers, and full opening up to Sri Lankan are factored in, not only they dramatically alter the so-called capacity hike planned by the two national carriers but also defeat the very objective of such a fleet acquisition, especially the sort of single aisle short-range aircraft and medium capacity medium range aircraft AI and I-A are planning to buy.

It must be considered that most Asean carriers, including Sri Lankan and its 49 per cent owner Emirates, today fly wide-bodied, twin-aisle aircraft to India which include the Boeing 747-400s, 300-plus seaters such as Boeing 777s or A 340s besides the 290-seater Airbus A 330s. Aviation industry experts contend that when the carriers such as Malaysian, Thai, Singapore fly with top class aircraft, why should an Indian passenger opt to fly IA or A-I, especially when he has to connect long-haul flights from either Bangkok, Kuala Lumpur or Singapore for destinations in the US, Europe, Australia or even Japan.

They also point out that A-I, which is seeking to buy 18 of Boeing 737-800s, will not be able to use them on the Singapore route (five-hour flying time between Delhi and Singapore) because the aircraft would not be able to operate on this route without a payload penalty which means either lesser cargo or fewer passengers.

Yet another aspect of the open sky policy is that it may tempt most Asean airlines and Emirate-pushed Sri Lankan to deploy much bigger aircraft such as the Boeing 747-400s on all days of the week to the Indian metros, leaving nothing for IA and A-I. One can only imagine the inexorable impact on the national carriers if Singapore Airlines and Malaysian Airlines press into service their super-jumbo Airbus A 380 that can carry 555 passengers in three-class configuration.

Among the nine leading airlines in the world, which have placed orders for the A 380, are these two airlines. Airbus Industrie had already surveyed Delhi and Mumbai airports and certified them fit for A 380s. Probably the fear of A 380s would have goaded the Centre to limit flights a day to each other four metros, though there is no restriction on seats. It needs to be noted that most of the traffic carried by these carriers are ethnic Indians and those who come under Friends or Relatives (FOR) segment.

The open sky policy even in a phased way and restricted to Asean and Sri Lankan in tune with India's "Look East" overall foreign policy framework will have an adverse impact on the economics of India's national carriers, though the drastic fall in fares such an open sky policy entails will be to the immense advantage of the travelling public.

The fierce battle for a pie in the sky among the competing carriers to fly the rich or even middle-class Indians to travel to the US, Europe and Australia will result in a steep fall in fares, negating all the well-laid plans postulated by IA and A-I. If the competition among carriers drives down fares, yields will also come down, upsetting the cost calculations of the two Indian carriers, besides eroding the viability of the fleet expansion programme. The new fleet of IA and A-I could soon become unsustainable, due to not only misconceived or mistaken aircraft choice but also competition triggered off by the open sky policies.

As the lifeline of any airline is the route it flies and if it loses such routes or what in civil aviation parlance called bilateral, the privatisation of both the carriers will be difficult to accomplish. As it is, the social cost being borne by the two domestic airlines was pushing them into unsustainability, and it will only be a matter of time before they end up with huge losses driven by the remorseless competition.

Even as the Naresh Chandra Committee has suggested privatisation of the national airlines, no time should be lost in the maze of first giving stakes to DFIs or FIIs and then scouting for a strategic partner. This is crucial as domestic private airlines are being allowed to fly foreign destinations and foreign airlines are being offered routes to more Indian destination to fly to — moves that can make survival difficult for the incumbent operators (both IA and A-I), leave aside finding a partner who can take stakes in the losing concerns.

Instead of sequencing reforms in the civil aviation sector properly, the Naresh Chandra Committee's recommendation of privatisation of national airlines at a time when the Government is launching a selective open sky policy will only erode the value and worth of the native brides decked up for marriage. Is it not wrong to put the cart before the horse, and the best course open for the government would be to expedite the disinvestment exercise in IA and A-I?

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