Ratan Tata, the Chairman Emeritus, Tata Sons, is crying foul over an existing aviation policy that requires new airline companies to fly in India for five years and have a fleet of at least 20 airplanes before becoming eligible for international routes.
Tata is right in pointing out that the rule does not make any sense in allowing an airline to bleed in the domestic markets, with 20 aircrafts in tow for a period of five years. Given high competition in the industry, very few older airline companies, operating purely as a domestic player, are profitable. And that is the reason most airlines want to fly on the profitable international routes and cross-subsidise the losses in their domestic operations.
But SpiceJet promoter Ajay Singh justifies the rule, saying every airline, including his, had to go through five years of labour pain before being allowed on international routes.
While the tussle between Tata and Singh has once again revived the debate on industrial protectionism through government policies, it is clear that older companies that were made to follow the rules are expecting even the new players to toe the line in the name of level-playing field.
Take a peek into history and you will know that on account of the 5/20 policy, some airlines on the domestic sector had to shut down because the losses did not allow them to get anywhere near the threshold of five years. Therefore, Tata is right in questioning the 5/20 restriction. Just because one set of companies had to bleed and survive, is it necessary that every new company that enters the space has to go through the same pangs?
Privatisation of airline industry was at a relatively nascent state when SpiceJet, a low-cost carrier, was launched. Ajay Singh and SpiceJet deserve the credit of creating the no-frill sector and surviving the price war, which resulted in the closure of some airlines and consolidation of others. SpiceJet, IndiGo and Go Air managed to keep their heads above water during the nascent years.
The government’s logic for introducing the 5/20 rule was that airline industry should serve the domestic sector and make air travel possible in the country. Given a choice, airliners would have liked to keep their Indian operations small by flying only between the metros or other viable routes and prefer to fly as many international flights as possible.
However, the government too has a social commitment to provide basic infrastructure services to its population and hence comes up with such rules where companies are forced to fly on routes that can make them bleed. But then such policies should have a carrot and stick approach where if a company is plying on an unviable route, they should be compensated in some way. Forcing socialist policies down a sector’s throat will lead to confrontation that we have seen in the case of Ratan Tata and Ajay Singh.
In Ratan Tata’s case, Ajay Singh’s words stick because Tata has partnered with foreign airlines to operate two airlines -- AirAsia India with AirAsia Bhd and Vistara with Singapore Airlines. Both the parent companies are making money by flying internationally, but their Indian entities are bleeding. The Tata group, as the Indian partner in both the ventures, wants to see their operations turn profitable as soon as possible. One way of doing it is by flying Indian passengers to the global partner’s terminal.
Jet Airways has gone through this route in its association with Etihad. Etihad with its investment in Jet Airways made it apparent that it was paying the premium only to tap Indian traffic to the western world. The West Asian airline has smartly used its base to fly in passengers to India who fly to West Asia or use it as a stopover for journeys to Europe or Americas.
