Sunday, November 13, 2011

Of course, the government should bail out Kingfisher…..


A question has been asked and as usual the answer has become a political one. Should the government bail out Kingfisher Airlines? I thought the answer would be an obvious “Yes”, but every political party with the exception of the ruling Congress has said “No”. The BJP has surprisingly spoken against the bail out. The Left doesn’t like the private sector at all and hence their opposition is well understood. Sadly, even the Congress appears to be dithering on the PM’s comment that the government would consider ways to help the airline and the entire aviation sector. If the government doesn’t help the sector, who will?

There is this mistaken notion that since the airline industry is largely in private hands, the government has no responsibility any longer towards its development and upkeep. This is pure rubbish. Opening up a sector to private players is a way to increase competition, improve the service standards and encourage faster growth. We’ve seen all that happen in the airline sector. Last year, more than 51 million domestic passengers boarded airlines within India (these are not 51 million unique people; but the total number of flights taken). Airline travel has become a much more pleasant experience than in the days when Indian Airlines was the only airline available; with tickets available on demand (most of the time), ticket prices coming down (apart from temporary spikes) and airline service standards becoming much better. All this has helped people move around easily across the country – helping business growth in the process. The aviation industry is a key player in any country’s economic growth story. Why would the government hesitate to help it?

To be sure, it is the government’s job to help every ailing sector. When times change, and entire sectors of the economy get into trouble, it is the government’s job to intervene and make policy changes that help in reviving the sector. That’s what happens in even the most capitalistic of all countries. In the US, the government provided several bail-outs to several large sectors including housing, banking, automobiles etc when the recession first hit in 2009. It was the same in Europe. Even in China where 80% of the economy is in the hands of the government, steps were taken to help all sectors including those where private players dominate. In India also, the government had given excise duty cuts and other similar concessions to reduce the impact on the Indian economy. Why then should the Indian thinking be any different now? Why should the government feel guilty of helping this crucial segment of the economy? In the 21st century, governments of all countries have to be pro-industry. When industry segments get into trouble, it is but obvious that they must provide relief.

We are not talking of bailing out one airline alone. Much of the recent debate has been on Kingfisher, but the problems that Kingfisher faces are the same as those faced by all others. The biggest airline in the country – Jet Airways – has just turned in a loss of some Rs 700 odd crores in the 2nd quarter of this year. This is a steep drop from a small profit (but profit nonetheless) reported in the same quarter last year. Likewise, Spice Jet has reported a loss during the quarter. The state carrier – Air India – is in massive losses – but that is a different story entirely (and I am not in favor of keeping Air India alive). If an entire industry segment is in trouble, the problems are beyond the control of a single company. It is no longer the company’s problem alone – it becomes the country’s and the government’s problem.

There are reasons for political parties to take the “Don’t help Kingfisher” line. Airlines supposedly cater to the top-end of the population and in an era when everyone is trying to woo the aam aadmi, who cares about the well off (“khaas aadmi” as the BJP called them)? If any bail-outs have to be given, and public funds are used (by asking PSU banks to give further loans; by lowering cost of ATF by cutting taxes etc), then it might be seen as pandering to the well-off at the cost of the poor. There is an element of truth in this – but its only a very small element of truth. There are many things the government should do to revive an industry in trouble.

For example, allowing FDI into the aviation sector so that foreign money can flow in. What could possibly be wrong with this – except to those who viscerally oppose any form of FDI (Like the Left – but then if the Left had its way, we wouldn’t be using Lux or Gillette or Colgate and we would still be driving the Ambassador car). As businesses become global, ownership of a company’s equity gets spread around the world. Indian companies are today buying out global businesses – and just like we support that – we must also support foreign airlines buying into domestic carriers. In any case, in typical Indian fashion, the limit for FDI will only be raised in steps. It will typically start with 24% (or 26% if the government is very bold!), move to 49% (or 51%) and then eventually settle at 74% to 100% after a few years. How does it matter to us if Jet Airways was owned 51% or 74% by a foreign airline and not by Mr. Goyal? Such old fashioned thinking is disastrous in today’s modern economy.

The question of rationalizing fuel prices is more difficult to handle politically. On the one hand, the price of petrol – used mainly by middle-class urban folks like us – keeps rising and is now at an exorbitant Rs 73 a litre. On the other hand, how can the government possibly justify a tax rationalization and a price cut on the Airline Turbine Fuel (ATF)? The airline sector pays only Rs 53 or so per litre of ATF. It’s a good question. I support raising petrol prices for middle-class folks, but I also support cutting taxes for ATF to lower their prices. The reason is simple: the airline sector should be seen as part of the “transport infrastructure” of a country. Most people who use airlines use it for business purposes. A growing aviation sector is helped by and in turn helps the growth of the entire economy. It shouldn’t be thought of as a luxury that only the rich can afford. If Indian airlines have to pay much more than foreign airlines for ATF, how will they compete with them? That’s why price increases of petrol are not comparable with a price cut in ATF. Just look at the impact the higher fuel prices are having on the airlines – cost of fuels is 40% of the operating cost of an Indian airline. It is 20% for international airlines. Cost of ATF in India is 60% higher than anywhere in the world as per the Economic Survey of India presented to Parliament in Feb 2011. This is not the case with petrol which is cheaper than in India than in most European countries. Clearly, ATF pricing needs to be corrected.

There is also this other question of asking PSU banks to “restructure” loans given to airlines. This is a common practice in the banking industry and is done for many sectors – it should not be seen as a special step only for the airline sector. The power generation and distribution sectors are also in trouble and companies in those sectors are also seeking a restructuring of bank loans. There is nothing wrong with loan restructurings as long as they are accompanied by strict conditions. Conditions, which help improve the financial viability of the companies. Conditions, which ensure that the companies can pay back the loans – even though at a later date. It’s the same as the ECB and the IMF bailing out Greece – but with many stiff conditions imposed. Newspaper reports indicate that Kingfisher is already talking of selling different assets so as to pay the banks at least part of the money borrowed. The promoter of Kingfisher Airlines – the UB group – is talking of putting more equity into the company. Many other such tough conditions can be laid down before loan restructuring is done. If banks refuse to do this, it’s alright for the government to nudge them a bit….

Like I said earlier, I don’t support the continuance of Air India. Any bail-out of Air India will also have to come with stiff conditions – cutting back employee strength, professionalizing the management, cutting the freebies given to government employees, improving productivity of the aircrafts etc etc. But given the political patronage that Air India occupies, it is difficult to imagine how these touch conditions would possibly be acceptable to Air India. Besides, even if all this was done, how easy is it for a government company to provide top quality service to its customers – a must for any player in the airline industry? Not easy at all, in my view. That’s why Air India should be sold off.

The importance of the airline industry in the overall economy is well known. As per data readily available off the internet, the US civil aviation industry directly creates 4.2 million jobs in the airline, travel and tourism sectors. Its contribution to the US GDP is nearly 9%. If indirect impact is considered, as many as 11.2 million jobs are related to the civil aviation industry. Figures for India are not readily available; and admittedly the impact might be smaller; but one should not forget that a lot of growth potential exists in our tourism sector. India gets only 5 million foreign tourists a year right now. China gets nearly 55 million in contrast. If we have to realize the full potential of tourism, it is important to have a vibrant airline sector. Once tourism numbers grow, employment in the airline/travel and tourism sectors could run into tens of millions. This is why it is the government’s job to take corrective steps for the airline sector.

The real truth is that the airline sector needs a government bailout. The PM is right when he talks of it. Economic decisions should not be taken basis their political repercussions, but on their own merits….

2 comments:

  1. A very clear and cogent argument FOR bailing out KFA, but it will go only as far as ..... the next Kingfisher Calendar. I'd keep one eye on the difficulty of marshaling public sentiment FOR KFA because Mallaya's penchant for the lavish globe-trotting lifestyle, the excess, the F1 dabbling, the Whyte&Mackay buying .... who is to stop the aam aadmi from wondering if taxpayer money is being used to rescue and prop all this up? Lets be aware that one reason Air India has got away with so much banditry is the paavam, impoverished image the airline cultivates.

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