Mumbo-Jumbo

The airline industry is expected to accumulate losses of around Rs 8000 crore this year. The two leading private carriers, Jet and Kingfisher, are losing Rs. 8 crore a day. To compound problems, the airline industry is a high-debt industry. The cost of a small passenger Boeing 737 or A-320 is close to Rs 250 crore. And employee unions tend to be very strong, given the specialised nature of work of some employees, like engineers and pilots. Negotiating lay-offs and pay cuts isn8217;t, therefore, the easiest of tasks.

Why are they making losses?

The airline industry is going through a bust in the midst of a general economic downturn. The worldwide industry is, in any case, prone to a sharp boom-and-bust cycle. The latest figures from the Indian market suggest that all the airlines are operating at just about 50 per cent of capacity. The problem for airlines is compounded in India by the extremely high price of aviation turbine fuel, one of the highest in the world. The government levies high taxes on jet fuel to cross-subsidise consumers of petrol and diesel. Airlines are not allowed to import jet fuel from abroad, which would be a cost-effective solution in the current circumstances.

Why was there controversy over Jet sacking its employees?

In a free market economy, companies have to reduce costs when faced with a downturn, including on their wage bill. So pay cuts and lay-offs are perfectly reasonable in normal circumstances. The problem in the case of Jet Airways8217; action was the shoddy and hasty manner in which it was done. No due procedure notice period, pink slip, salary compensation was followed in the dismissal of 1900 employees.The arbitrary and quick decision followed the announcement of an alliance between Jet and Kingfisher, the two market leaders. There was more than a hint of collusive and anti-competitive intent in the merger, the first impact of which was borne by the fired employees. A rise in passenger fares might be the next step, as the only serious competition a Jet-Kingfisher alliance faces is from the state-owned airline, Indian. Unfortunately, the industry has no independent regulator to look into competition, and other consumer issues. The Competition Commission of India is dysfunctional for the moment.

What8217;s the way out?

Broadly speaking, there are three options. First, the government can consider reducing the burden of high aviation turbine fuel prices by lowering taxes on it. This is different from a cash bailout for stricken firms, which is highly avoidable, but which is what airline bosses are clamouring for. Second, airlines must restructure their organisation and operations and remove excess flab from their systems. Plenty of excess was committed too much staff, too many planes, too many routes during the boom of the last few years. Any government bailout will prevent this from happening. Airlines, though, must be careful to follow due procedure in restructuring. It would help if senior management also took the brunt of pay cuts and lay-offs along with more junior employees. The third option is the one which would be the least appealing to the private promoters of major airlines: to dilute their equity stakes to raise cash to ride over the difficult times. Promoters control 80 per cent of Jet Airways and 75 per cent of Kingfisher. So there is room for dilution of equity. The price will not be the best in these economic conditions, but entrepreneurs must take some blows in a well-functioning capitalist system.