Medium Term: Why doesn’t the government do something about the aviation industry?

In the fuss over the near collapse of Kingfisher and the crisis in the aviation industry, several issues

have been confused. One architect of this confusion is Vijay Mallya himself. According to Mallya, Kingfisher’s problems are not his fault. They stem from

hostile government policy. It is impossible, he says, to run an airline in India because the odds are stacked against all operators. Just look at the fate of Air India, he declares. In his own case, he adds, Kingfisher would provide a full schedule were it not for the arbitrary action of the income-tax department in freezing the airline’s bank accounts. Therefore, he concludes that the way forward is for the income-tax department is to de-freeze his accounts, to hold off on collecting his dues, and for the government to persuade banks to lend him lots of money. And, while they’re at it, they can also change the policy to allow him to flog nearly half his airline to some foreigner.

 

   Passengers who have arrived at airports to find that their Kingfisher flights have been arbitrarily cancelled are not persuaded by Mallya’s arguments. Neither are many independent observers. Commentators have argued that it is not the job of the government to help a private company when it is in trouble. Kingfisher has obligations to its passengers, its employees and its creditors. It is up to Mallya to meet these obligations without looking to the government for help.

 

   The problem Mallya faces is one of credibility. For two decades now, he has played up his billionaire lifestyle. Magazines have featured his luxurious homes. Attention has been focused on his private jets. And he himself has revelled in the title of the King of Good Times.

 

   When a man who flaunts his wealth in so brazen a manner stops paying salaries to middle-class employees who consequently have difficulty keeping up with their rent payments or school-fees for their children, without making any changes to his own billionaire lifestyle, he is certain to attract a certain amount of public disdain. When the same man then pleads with the government to get public sector banks to bail him out, citizens are certain to ask: why don’t you sell your homes and your jets instead of asking for our help?

 

   And indeed, Mallya is not a good advertisement for the current state of the airline industry.  To some extent, Kingfisher’s problems are of its own making. Certainly, no other airline has behaved with such cavalier disregard for basic norms. For instance, Kingfisher was supposed to fly on unprofitable north-eastern routes – just as other private airlines do – in return for getting trunk routes. It stopped flying to the north-east but hung on to the profitable trunk routes anyway. Another instance: all companies are supposed to deduct tax at source from salaries and payments and to then pass the money so collected on to the tax authorities. Kingfisher deducted the money all right but did not pass it on. It simply pocketed crores of rupees.

 

   There has also been an unprecedented reluctance to pay people the money they are owed. All airlines are staring at bankruptcy. Yet, most struggle to pay salaries and to ensure that creditors are not kept waiting for too long. Kingfisher is easily the worst in this regard. Creditors are not paid, bills remain outstanding for long periods of time and staff salaries seem to be a low priority.

 

   In the light of all this, it is not difficult to see why Mallya attracts so much public scorn and so little sympathy.

 

   But the problem is that if you were to take away the stuff that Mallya says about his own airline, the general points he is making are almost entirely valid.

 

   No, of course it’s not right to welsh on your obligations. And the solution to any private company’s problems is not a taxpayer-funded bail-out. But Mallya is bang on target when he says that it is almost impossible to run an airline profitably in this country. And he is also right when he says that this is largely the fault of the government.

 

   Those of you who are old enough to remember the dark days of government control and monopoly of the domestic skies will recognize how much private enterprise has made things better for the Indian passenger. There are more flights than ever before. The real cost of air travel has come down. And such airlines as Jet and Indigo offer world-class services that are far superior to anything you will find in Europe or America.

 

"World-class airlines will be allowed to die. Indian passengers will find themselves with few choices as private carriers close down."

   What’s more, the private airlines are not necessarily doing badly. Try getting a seat on a Jet flight or an Indigo flight and you will find that it is not easy. Jet’s international sectors are packed. And by and large, passengers are happy and content.

 

   So, why then is the aviation industry on the verge of collapse?

 

   The answer has to do with government policy. India has among the highest fuel prices in the world. Aviation turbine fuel (ATF) is not cheap wherever you go (and likely to get more expensive as petroleum prices rise) but India has the unique distinction of levying taxes that make the cost of fuel prohibitive. What’s more, these taxes are levied on a percentage basis so, in recent years, as airlines have gone bust, the government has raked in a bonanza from rising ATF prices.

 

   Nobody in government denies that prices for ATF are now prohibitive. But ministers fall back on another excuse. They say that taxation is a state prerogative so what can the Centre do? In fact, there is a lot that the UPA can do should it wish to. Something like 60 per cent of all ATF consumed in India is sold at two airports: Bombay and Delhi. In both states, the Congress is in power. So, if the Congress leadership asks its chief ministers to reduce the tax burden, the airlines would be back in profit.

 

   But this is a paralysed government with no political will. So, nobody takes any decision on ATF taxation. No instructions are sent to state governments. And the airlines continue to bleed.

 

   A second factor is the high cost of using Indian airports. You will be startled to know that Indian airports – most of which are rubbish, anyway – have always charged higher landing fees than other Asian airports. Over the last five years, some airports have been privatised, giving individual airport-owners a potential goldmine in the form of property assets that have shot up in value.

 

   But instead of enjoying their good fortune, airport operators have increased the amount they charge airlines to levels that are ridiculous and unsustainable. It isn’t just Indian carriers who are complaining. Such international airlines as Air Asia and Austrian Airlines have pulled out of Indian airports claiming that the charges are extortionate.

 

   Given that airport owners are now sitting on thousands of crores of real estate that they have bought for a fraction of its true value, you would expect the government to rein them in. Instead, the civil aviation ministry and the regulator have been mute spectators to this highway-robbery style of increasing rates.

 

   Strange but true: just two decisions by the government could transform the fate of the Indian airline sector. If ATF taxes came down and if landing charges were more reasonable, then most of India’s airlines would be back in profit.

 

   Yes, that’s all it would take. So, why doesn’t the government do something about this? After all, the aviation industry is one of the great success stories of India in the 21st century. Why allow it to wither away and die when it is so easy to permit it to flourish?

 

   The short answer: because that is the way things work in India. We rarely look at the roots of a problem or take a holistic view. Politicians are much happier to make deals with individual industrialists than to help an entire industry.

 

   So, here’s what will happen. Vijay Mallya will tap his political contacts. He will claim that jobs are at stake. He will threaten that banks will lose their money if Kingfisher closes down. At first, the government will attempt to give the impression that it is listening to public anger at Mallya’s audacity at asking for a handout. But eventually, when the anger dies down, it will do a deal. Kingfisher will get a moratorium on its income-tax dues. Banks will advance Mallya money. And all kinds of sops will be offered to keep Kingfisher in the air.

 

   But even as these private deals are being negotiated to help an individual player, nobody will worry about the state of the aviation industry as a whole. World-class airlines will be allowed to die. Indian passengers will find themselves with few choices as private carriers close down.

 

   That’s the Indian way. We help those who know who to call. And we let an entire industry perish.