The Hindu Business Line : A cartel in the air?

As the sky above India gets crowded, and air fares nose-dive, worried airlines are forming a federation. Ostensibly meant to function like any other industry body and represent to the government its common problems, the federation may end up covertly setting a floor among member-airline fares. Its primary, if not sole, concern may be to reduce, if not end, all competition among its members, says ASHOAK UPADHYAY.

AIRLINE COMPANIES readying to fly in a new formation.

Barely has the aviation sector opened up and the ten players currently in air have got together to form a federation, according to media reports, to represent industry interests and work together. On a surface view, this move appears a logical outcome of the winds of change that have swept through the closeted industry and knocked the erstwhile monopolies, the two national carriers, from their commanding heights. With eight private players, of different sizes and with varying capacities, the passenger has never had it so good; air fares are dropping, booking is no longer a nail-biting exercise. As can be expected, services in those old publicly-owned carriers have also improved.

The airlines themselves are none too happy, with many reporting loses for both the year gone by and the second quarter of the current fiscal. Competition, it seems, is forcing not simply the erstwhile monopolies but even the new entrants to fight for passengers and lower air fares to fill the seats. But there is a point beyond which many airlines will not be able to lower the fares; the laws of free market economics would force some to fold up. After all, freedom for business involves two doors, and the exit is as important as the entrance.

Birth-death cycle

Two decades after the end of licensing, almost every segment in manufacturing has gone through this cycle of birth and death and come out the healthier for it. There is no reason why the airline sector, nascent as it may be should not undergo the same process of creation and attrition.

Clearly, the proposed federation does not intend to let the natural process of competition take its toll of the weak and unsustainable. Officially, the body, to be called the Federation of Indian Airlines (FIA), is meant to function like any other industry organisation and represent to the government its common problems. But the most acute problem that it is facing is a fare war that is benefiting none but the consumer. Historically, airfares have been far too high given the position that Indian Airlines occupied as the sole means of flying in India. From that historic high, airfares have dropped dramatically; in the initial phase, the early entrants cashed in on the monopoly slipstream but the shortfall in supply has been filled in by newer entrants with low carrying costs — the no-frills airlines. Now, even these are suffering the de-escalation of prices and the promoters are worried; so is the Ministry of Civil Aviation, the representative owner of the two national carriers that have always been in the red despite their monopoly pricing. If things could get worse, they would; so competition rules. The FIA would like to stave off that possibility.

Infrastructure issues

One of the stated objectives of the FIA is to voice infrastructure problems. Had the private airlines expressed this view, it would have been justified. There is a pecking order for space at domestic terminals with the two national carriers right on the top. Other, more core infrastructure, problems are endemic and they are carved in stone; one does not expect the FIA to ask its members to stop flights if runways are not improved or air traffic control systems modernised, or, if the privatisation of airports stalls. For the lobby, the problem is competitive pricing.

The FIA may covertly set a floor price among member-airline fares; it may even ask its members to standardise services to make each airline as close to perfect substitutes as possible. The primary, if not the sole, concern of the FIA will be to reduce, if not annihilate, all competition among its members who fear competition may drive them to the wall. That eventuality will make the FIA more than an industry lobby. Since the capacity to bear losses in the first flush of operations varies among private carriers, it makes eminent sense for them to respond with alacrity to the clarion call of a government-owned carrier. The fact that the public sector carriers have been the biggest victims of the competitive process currently at play makes the government-as-owner an accessory to the FIA's operations.

Elements of the old

The Civil Aviation Ministry can justifiably pride itself at having enabled the `birth' of the private sector airline and ending the power of its own airlines. But its proximity to their fortunes, now to be mediated through the FIA will reintroduce those elements of the old `socialist' economy that in fact created a monopoly economy. Socialist in name and oligarchic in functioning, the organised economy's fortunes were predetermined by a regime that allowed prices to remain artificially high by controlling capacity and therefore supply. The permit system has gone; but there is a possibility that the FIA will wreck upon the final consumer one of its worst effects — propping up prices through cartelised, informal but informed arrangements.

A competitive economy can have thousands of engineering units or, perversely as India shows, thousands of engineering colleges. But the airline industry self-regulates its numbers more ruthlessly; its capital-intensive, cyclical-demand driven nature, at least in India, makes entry prohibitive and exit necessary. Contrary to other industries, the airline sector also has a faster, more cruel attrition rate that limits its numbers Like natural selection, the laws of competition keeps healthy airlines afloat, a process that consumers would heartily endorse.

Simply from their point of view, it makes little sense in keeping afloat, through government protection, or through lobbies, airlines that need to sink into oblivion. But it is a sign of India's tentative movement to a free market economy that the past continues to haunt us in our concern to protect what does not need protection.

Cartels on watch

Media reports hint that the Competition Commission is watching for any cartel-type move. Around since 2003, its charter mandates it to locate "Anti-Competitive Agreements" and "Abuse of Dominant Position by enterprises" in Indian industry. It will not have to wait for long to discover what the FIA is up to, given the fluidity of an industry that cannot keep both its numbers and the price of its services moving in the same direction.

Since the industry's new representative, the FIA cannot control the former it can try to stabilise the latter. What the Commission would also do well to ask itself before anything else is the role that the Civil Aviation Ministry has had in blessing this anti-competitive enterprise pioneered by its fully-owned carrier.