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Shoot-out in the skies

Surajeet Das Gupta | February 07, 2004

It was a do-or-die battle in the Indian aviation industry. On one side was highflying Jet Airways. On the other: just about every other player from Indian Airlines to tiny newcomer Air Deccan. Even a host of peripheral players like the travel agents and tour operators were ranged against Jet.

The subject of the battle was a proposal by the aviation ministry that almost casually sought to restructure the Indian aviation industry.

The proposal, which was brought before the Cabinet on Wednesday evening suggested that private Indian airlines should be allowed to fly anywhere in the world except the Middle East.

That was a startling recommendation by itself. Even more extraordinarily, this far-reaching proposal made it to the agenda of the last Cabinet meeting of an outgoing government.

But by midweek it was clear that the proposal had split the aviation industry and that a furious aerial dogfight had broken out over the Capital's skies.

The proposed note was doing the rounds on Tuesday to a select few in the travel industry and tension was building.

Firstly, the main proposal itself upset many big and small players. In addition, there were some key riders that would have tilted the balance in favour of one airline.

The note proposed, for instance, that an airline would have to be operating domestically for at least two years before it would be allowed to fly international routes.

Additionally, the policy appeared to favour the biggest players because it suggested that the routes were to be given out on the basis of the available seat kilometres (ASK), which an airline has flown in the last five years.

The ASK is calculated by multiplying the number of flights an aircraft has flown in a year multiplied by the total number of seats.

Obviously, Jet would be the biggest beneficiary of this policy. At the same time other smaller airlines like Air Deccan, which has already said that it plans to fly to Colombo would be shut out from the new order.

So, it wasn't surprising that the Cabinet meeting turned out to be stormier than expected. But the opposition came from unexpected quarters.

Leading the charge was the articulate Telecommunications Minister Arun Shourie who laid out a point-by-point case for deferring the decision. Even more unusually, he was backed by Labour Minister Sahib Singh Verma.

Shourie argued that security might be compromised by the new arrangement. Finally, the meeting was adjourned and the official line put out was that the ministers had to rush to Parliament for a late night vote.

Most industry insiders heaved a sigh of relief at the news -- and that included the state-owned carriers. They would have been hit by the new proposals in more ways than one.

Firstly, they would have had to face competition on international routes. In addition, after three years they would have lost the rights to sign bilateral agreements, after the current ones expired.

Bilateral rights are signed between two airlines -- say Lufthansa and Air-India. But, if for example Lufthansa flies to India and A-I doesn't fly to Germany. A-I can claim a payment in lieu. In fact, most of Air-India's revenues currently come from unused bilaterals.

Would that amount to destroying the state-owned carriers? A large section of the industry certainly thinks so. And, while they may not be enthusiastic about Air-India they certainly don't want new private sector monopolies to emerge.

The Government insists that it's only trying to implement the Naresh Chandra Committee report handed in recently. But aviation industry sources say key recommendations have been left out.

There is, for instance, the recommendation about allowing foreign airlines to have a 49 per cent stake, which has, for the time being, been overlooked completely.

Many suspect the hand of vested interests, which have been trying to tailor policy to suit their interests.

Says an agitated Subash Goyal, chairman of Stic Travels and president of the Indian Association of Tour Operators: "You can't have the cart before the horse. How can you make no effort to privatise and strengthen your own state-owned airline, which is part of the Chandra report and only implement one part allowing private airlines to fly international routes? If you do so you will kill the national carriers."

Goyal points out that Sri Lanka, for instance, first roped in Emirates as an equity partner and strengthened the airline before introducing an 'open skies' policy in the country.

In a similar vein, other aviation experts say that the Government should be clear about what it wants before making any moves.

Argues Kapil Kaul, senior vice president of the Centre for Asia Pacific Aviation: "The Government has to make up its mind whether it wants to close down the national carriers and allow Jet to take that place. Or if it has some strategy for the national carriers."

Not everyone agrees with that viewpoint. Some say that the Government chickened out and failed to take a decision.

Says Balbir Mayal, managing director, New Airways Travel: "We are upset as an industry. What is the point of the PM announcing such grandiose measures and then failing to implement them?"

Mayal goes even further and argues that the Government has succumbed to pressures from international carriers which are not in favour of competing with more efficient Indian private carriers.

Jet itself, refuses to comment on the whole controversy. "There is a lot of speculation about the policy and I wouldn't like to comment on it," says Saroj Dutta of Jet Airways.

The fact is that a clutch of smaller airlines is about to challenge the existing players like Jet, Air Sahara and IA. Air Deccan, for instance, has big ambitions in Indian skies and it will be expanding its fleet in the near future.

Similarly, East West Airlines is being resurrected and has plans to start flying with a fleet of 11 aeroplanes. East West is contemplating spending around Rs 800 crore (Rs 8 billion).

Both these companies have publicly made their intention to fly international routes very clear -- Air Deccan has already said that it wants to travel to Colombo. East West is also looking at south east Asia.

Says Faisal Wahid of East West Airlines: "While giving permission for a domestic airline you already have so many pre-requisites like paid up capital, the infrastructure that we are putting up etc. So why do you need a two-year operating experience over and above that?"

Wahid argues that this condition essentially aims at protecting existing private operators in the domestic market.

And he also points out that if experience in running an airline is what is required East West already fulfils the criterion: it did, after all, operate for five years before closing shop.

A similar view is echoed by the low-cost Air Deccan. Says managing director G R Gopinath cynically: "Why have a restriction of two years? Make it 15 years so that only IA can operate. Some of the private airlines want to create a cartel where they are the only ones who will operate. That is what even the national carriers want. No one wants competition."

Inevitably, the bigger private airlines see the situation differently. Says a senior executive in Air Sahara: "The restriction is justified as otherwise anyone will enter the domestic skies and start international operations without bothering about the domestic skies. In fact a minimum 10 per cent market share in two years should be stipulated so that only serious players are in."

But Sahara and Jet part company on the other key proposal on ASKs. That rule would only benefit Jet, which has been flying for more than five years and has far more planes and routes.

Says U K Bose CEO, Air Sahara: "This virtually means that we will always remain a small player while our competition will be a large player in the international routes."

Bose reckons that its ASK over five years will be only 10 per cent of that of Jet Airways. So it would always be a smaller uneconomical player.

Sahara instead has asked the Government to equally divide the routes between the two private airlines. That raises the hackles of others like Gopinath who argues: "Why should there be such restrictions. Leave it to the consumers to decide what they want to be travelling."

The national carriers point out that the open skies policy could meet another serious roadblock: the sharing of unutilised bilaterals with the private players.

Says a senior executive in a national carrier: "The sharing of bilaterals between IA and A-I has been a ticklish issue and there have been major rows over them. Imagine when domestic private carriers enter the fray. There will be utter confusion."

But the battle to open the international routes is also being fought at another level. Many MPs have raised objections to the piecemeal way in which the Government has been trying to liberalise the aviation sector.

For instance, several members of the aviation consultative committee of Parliament -- cutting across party lines -- have raised questions about allowing private airlines on international routes. Their main concern has been about the impact on the national carriers.

The MPs point out that the private airlines have increased capacity extremely swiftly in the last few years. But the market has grown at a slower pace than most expected.

That's why the airlines are desperate to be allowed to use their planes on profitable international routes. The MPs also say that the Naresh Chandra committee has pushed for a level playing field for private airlines -- however, IA and A-I are actually being put at a disadvantage because they haven't been able to buy planes for the last decade.

A-I and IA can't criticise the Government for obvious reason. But insiders at IA say the airline is being attacked from two sides. On one hand, foreign carriers are being allowed to fly into India.

For instance the Government has given out 47,000 seats a week during the last three years to foreign airlines. That means a lot of competition for A-I and also IA to a lesser extent.

At another level the number of seats given away to foreign carriers in the south east Asia has more than doubled in three years from 14,000 to as much as 32,000 seats a week currently.

Also, the Government has now declared a open skies policy with south east Asian countries so that their carriers can now fly daily to the four metros without any reciprocal rights for Indian carriers.

The Government argues that the bulk of the profits of A-I and IA come from the Gulf routes which have been protected.

The two Government airlines, however, say they are being treated extremely unfairly by the Government. Says an insider: "The reason why we cannot utilise our bilaterals it is because we have no new fleets and extra seats. Even the planned fleet modernisation will only replace old aircraft and marginally increase overall capacity. So why blame us."

The state airlines have strong arguments in their favour. IA, for instance, has been asking for permission to fly to more foreign destinations for the last two years. The request has been ignored.

Also, by doling out bilateral rights and allowing domestic airlines to fly internationally, the Government is lowering the value of A-I and IA.

"It's the international traffic rights that provide value to the airline. If these are given away why should one pay for buying A-I," asks one industry analyst.

Of course, there may be many slips before the private airlines can take off for foreign destinations. One expert says it would need a minimum investment of $100 million to start regular international flights.

Also, the Government would have to strike new deals around the world to allow private airlines to fly to different destinations. Some airports like Heathrow already say they have no landing slots for more flights and have even refused more slots to A-I.

Many bottles of champagne have been opened this week after the Government gave up its effort to push through its new proposals. No doubt the new Government will look closely at the entire issue once again -- and then the battle will start afresh.

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