Wednesday, December 24, 2014

Poor safety, financial health ail Indian aviation industry

Sanat Kaul, Dec 25, 2014

(The writer is Chairman of International Foundation of Aviation, Aerospace and Development)

While private industries in all sectors of the economy rise and fall based on the principle of survival of the fittest, should we attach the same laissez faire policy towards the airline industry? A lot of economists would go along with this proposition.

However, there is a need of caution in the case of airlines. While soap or cigarette companies may fall and go, airline industry has two issues to consider. The first is the safety and security of passengers and the second, oligopolistic character of the industry.

Safety and security should be prime determinants of a good airline followed by passenger handling and food. Passengers, however, look to the second determinant more and are not fully aware of the security and safety aspects.

India had changed over to a centralized government-run system of airport security after the hijack of an Indian Airlines plane in 1999 from Kathmandu, which has been satisfactory as no major security breach has happened since then. When 9/11 took place in New York in 2001, all the eight flights hijacked were domestic. The International Civil Aviation Organisation (ICAO) had cautioned the US government about poor security at its domestic airports – which was then being managed by the airlines themselves – where they employed the cheapest security personnel. Since then, they too have switched over to government security.

Safety of flight in aviation is, however, another issue which concerns airlines and air navigation providers. The Charki Dadri crash over Delhi on April 12, 1996 occurred due to poor understanding of the English language between Air Traffic Controller and foreign airline pilot. This led to ICAO stepping in to make English language compulsory for pilots and controllers worldwide.

Another level of safety is in the maintenance of aircraft by airlines themselves. While airlines are themselves interested in maintenance to ensure good safety record, when they are in financial straits, safety becomes the first causality because it is not as visible as passenger comfort.

Presently, India is facing the threat of poor safety of air travellers. The ICAO has in its safety audit report given a poor rating to India. This has been compounded by US Federal Aviation Administration (FAA) downgrading India to category II in January 2014, thereby bringing it on par with some African countries. One of the main reasons for this is the poor oversight by the regulator – Directorate General of Civil Aviation (DGCA). The next step may well be for European Union to bar an Indian airline from entering EU if they do not qualify their minimum safety requirements in the assessment.

Cumulative losses

In spite of high growth in air traffic in India, Indian airline industry is going through a bad patch, with cumulative losses for the last seven years amounting to about $10.6 billion. The latest decline of SpiceJet, now in dire need of capital infusion of about Rs 2,000 crore, is yet another reminder of deterioration in the financial health of the sector. Although Kingfisher Airlines, Air Deccan, MDLR Airlines and Paramount Airways have fallen by the wayside, new airlines are also emerging.  Is there, therefore, a need to worry?

Safety of flights becomes an issue when airlines are allowed to function on a poor balance sheet. In the US, the FAA renews the annual Air Operator’s License of airlines only after it is satisfied that its finances can support the level of flight safety required. The Airports Authority of India (AAI) and the oil companies are also to blame when they allow defaulting airlines to use their facilities and run up huge debts.

The other aspect that needs examination is the oligopolistic behavior of our airlines in general. Since airlines are a high cost and high risk venture, the entry level requirements limits the entry of new airlines. While there may exist excess capacity in the sector, the extreme price fluctuations in tickets from throwaway prices during lean season to very high ticket prices at peak time, makes airlines pricing look either predatory at one end or excessive at the other.

Although the government is blamed for the woes of the airline industry due to high taxes and charges and very high price of domestic aviation turbine fuel (ATF), amounting to about 45 per cent of operation costs as the cause for airline losses, it is nevertheless common to all airlines. The DGCA is empowered to look into excessive and predatory pricing, and it should. So should the Competition Commission.

In this connection, two issues need emphasis. All airlines have introduced dynamic ticket pricing software which even the best mathematical minds do not understand. 

The result of the pudding is in eating. They are all running into losses (even Indigo, the best performing airline, is on reduced profit margins). Then what good is this software which brings loss to airlines and very high prices to customers at peak time? Is there a need to restrict prices within a band so that neither excessive nor predatory prices are possible?

A healthy airline industry is therefore a must for safety. In addition, a strong DGCA which can inspect and regulate the airlines and airports is also necessary. The present DGCA is neither independent nor has sufficient financial powers. An independent Civil Aviation Authority is perhaps the right answer.


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