Flying in Red

With banks casting a veto and politicians also reading the riot act to the Prime Minister, Dr Manmohan Singh, suggestions of a state-backed lifeline for the beleaguered Kingfisher Airlines have hit a wall. Rightly so. The Government should steer clear of any intervention that creates moral hazard – which is precisely what bailouts of sub-optimally run businesses entail. It should actually have done this long ago, by refusing to inject periodic doses of taxpayers' money into the perennially comatose Air India. While the sector itself may be too big to fail – and could probably even be deserving of support – individual players are not.

That, in turn, exposes the fundamental flaw in the Government's approach to aviation: Crafting policies aimed at particular entities rather than the sector. Thus, there is this bizarre rule permitting foreign direct investment of up to 49 per cent in domestic carriers, so long as the investors are not airline companies. It was framed in the mid-1990s basically to block the entry of Singapore Airlines in association with the Tatas . Similarly, much of the Civil Aviation Ministry's recent energies have been devoted to trying to revive its own airline that today has a mere 17 per cent market share. The current crisis – where virtually every airline is bleeding, even if not as seriously as Air India and Kingfisher – should be an opportunity for the Government to turn its focus on the problems facing the sector as a whole. Fuel costs, making up some 60 per cent of operational expenses, are an obvious concern. These, in turn, have to do with State taxes on aviation turbine fuel that go as high as 30 per cent. There is certainly a case for ensuring uniform tax rates at least till global crude prices come down to reasonable levels.

Equally important now is the need to allow genuine foreign investors – meaning airlines and not institutional investors with no hands-on experience in the business — to operate in the domestic airspace. Besides benefiting consumers, it would also facilitate buyouts and exit of unviable operators. Ironically, the demand for allowing foreign airlines to pick up stakes in their companies is this time coming from domestic players themselves, in desperate need of capital. The Government should do all it can to create conditions for a proper shakeout in the industry. This role can also, perhaps, be played by the lenders, who have ended up owning chunks of shares in companies. They could take a lesson here from J.P. Morgan, who, as a major financier to American railroad firms, presided over their consolidation and restructuring in the early 20{+t}{+h} century. One thing that he succeeded in doing was to get them all to agree to maintenance of “public, reasonable, uniform and stable rates”.

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