Flying in the face

In the midst of a crisis, we8217;re treated to a sad sight: blatant rent-seeking behaviour, insiders colluding to deprive consumers of the benefits of competition and of technical progress 8212; and all in the hypocritical disguise of an airfare cut. Some domestic airlines, including Jet, have cut their fares, in response to sustained pressure to do so. Except that so far they haven8217;t really: what has been removed is the 8220;transaction fee8221; component of airfares, which is usually between 350 and 500 rupees. And that component is in itself worthy of examination; it reveals in microcosm why the airline sector is in such a mess. The fee was introduced a few months ago: not in response to market cues, but because associations of travel agents demanded from airlines that they be introduced to ensure that the prices that consumers paid online and at a travel agent8217;s were identical. Hence the collusion.

This window-dressing cut should not alter the pressure on the airlines to reconsider their fuel surcharge, something imposed when oil prices were going through their summer highs. Delaying this is cynical; this is the time of year in which people are planning their winter breaks, for example. Corporations that have made it clear that they are dependent on government munificence cannot expect to be allowed the cheerful amorality that we otherwise expect 8212; demand 8212; from our businesses. True, the government-owned airline might reduce fares soon; but it no longer dominates the market, so it cannot be expected to pressure the private sector. Air turbine fuel is less expensive now; and, while the current system of petroleum cross-subsidies keeping some products cheap at the expense of others is unsustainable, wasteful and distortionary, that alone is not responsible for airlines8217; woes. Those spring from faulty business models: 8220;budget8221; airlines providing full service, badly structured mergers. In a downturn like this, such structural problems need to be addressed.

Airlines and their associated ministry do not seem to have realised that the days of crony capitalism are supposed to be over. A blind eye cannot be turned to anti-competitive cartelisation of routes: the minister and his pals have made a strong case for a regulatory body with teeth. And if government is forced to help, then the owners must take a hit. If in times of prosperity, their success was celebrated, in times of hardship, they must tighten their belts. Across the world, shareholders are being forced to dilute equity, often at unfavourable prices. That, and the consequent new ideas and turnover of old, corrupt business models, are precisely what liberal market capitalism is all about.