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Blaming everyone else

India’s airlines must own responsibility for their mess. That’s market discipline

Written by The Indian Express |
August 3, 2009 2:46:52 am

Private airlines have called off their “strike” planned for August 18 but India’s airlines are clearly a disgruntled lot. Their sense of grievance has been building for some time,culminating in recent demands which focus particularly on airport fees and fuel costs. They have a point: airport fees,especially in Delhi and Mumbai,have been revised to

the airlines’ (and customers’) disadvantage to benefit contractors who inappropriately underestimated their costs; and,the price of air turbine fuel (ATF) is kept high because of India’s dysfunctional energy policy.

But if the airlines think that this absolves them from responsibility,then they’re wrong. The airline business is tough. It requires corporations that can both plan — given the massive purchases and sunk costs involved — while also being nimble: to respond to political constraints,sudden changes in travel patterns,variation in fuel prices. Simply put,the complainers have failed to do this. In the short- and medium- term,they have made bad corporate decisions; and their overall business plans are poorly thought out and are the primary cause of the crisis. It is no coincidence that,even though some “low-cost” airlines had joined the strike call,they’re making profits while “full-service” airlines like Kingfisher and Jet are massively in the red. Kingfisher’s Vijay Mallya famously derided India’s first low-cost carrier,Air Deccan’s plans half a decade ago,saying it wouldn’t work in India. In a capitalist economy,if you place massive bets based on thinking of that sort,you cannot blame anyone else if you lose. This year budget airlines have,for the first time,a majority of flyers; and their relevant marginal cost,the cost per available seat kilometre,is half that of the full-service airlines,which is almost Rs.5. That is simply too much of a gap to be sustainable,and business plans that thought so have deservedly been shown up.

India’s airlines now complain that fuel prices are 45 per cent or so of their operating expenses. (Changing that will face stiff opposition from states,which benefit from sales taxes on ATF.) They will claim that the actual price they face is higher than that faced by other airlines worldwide; but that is a fallacious argument. Where they compete with those airlines,they face a level playing field,able to buy ATF at cheaper international rates. The question is why they thought business plans could be imported from abroad to Indian conditions,and a very different cost structure. There is no reason why that would work in the airline industry,when it wouldn’t work in any other. Unfair,sure; but in a market economy,you have to expect unfairness and turn it to advantage.

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