Foreign body

Air India is unfairly blocking private airlines' overseas expansion

It is a sad commentary on a country’s economic policy when a government-owned company leverages its monopoly to not only keep domestic competition at bay — but also actively, if unwittingly, helps foreign competition in the process. This, at least, is the predicament in which the domestic airline industry finds itself vis-à-vis Air India, as Civil Aviation Minister Vayalar Ravi unintentionally confirmed last week. Replying to a Lok Sabha question, Mr Ravi said India had signed bilateral air service agreements with 109 countries in 2010-11 and Indian carriers had utilised just 20 per cent of them in that year. In other words, 80 per cent of bilateral quotas lay unused by Indian carriers. At the heart of this abysmal capacity utilisation figure is “national carrier” Air India. By law, the state-owned carrier gets first right of refusal on these overseas routes. Since the airline is reeling under cumulative losses of almost Rs 20,000 crore and a debt burden of Rs 43,000 crore, it is in no position to avail of this benefit.

Far worse, it has declined to give up these rights in favour of those who can — the private domestic airlines. Thus, for a whole swathe of lucrative routes — Dubai, Singapore, Thailand and Central Asian countries, for instance — foreign airlines like Emirates, Thai Airways and Air Asia have been able to acquire market dominance by default. For instance, according to a report by the Comptroller & Auditor General (CAG), Dubai carriers use almost 99 per cent of the bilateral quota on that route; for Indian carriers the figure is 46 per cent. Overall, some have estimated, India utilises roughly 35 per cent of the bilateral rights that have been negotiated. Meanwhile, the newly energised CAG has criticised the ministry of civil aviation for being over-zealous in negotiating bilaterals — quite missing the point that there is a developed domestic industry that is more than capable of taking advantage of it, were it allowed to do so. Now, it appears, the civil aviation ministry is unlikely to revise this policy.

This artificial entry barrier is particularly damaging for domestic airlines because most of them — both full-service ones like Jet Airways and Kingfisher Airlines and low-cost ones like IndiGo and SpiceJet – have been forced to put on hold overseas expansion plans that could help counter the slowdown and higher operating costs in the domestic market. To be sure, cash-strapped private domestic players have long learned to operate in a bizarrely asymmetrical domestic market, in which a grossly inefficient and overstaffed corporation is kept afloat purely on bail-outs funded by the taxpayer. That alone provides Air India the ballast to charge competitive fares that the more efficient competitors are forced to emulate, inevitably putting pressure on their bottom-line. In any other open market, this state of affairs would have attracted the attentions of the competition regulator. In India, it only encourages the government to offer yet another bail-out.