The Hindu : Airline industry: Commercial sense v Govt. ownership

Online edition of India's National Newspaper
Saturday, May 31, 2003

Business

Business

Airline industry: Commercial sense v Govt. ownership

By C. R. L. Narasimhan

The "flexi pricing'' and other promotions on offer are good for air passengers. The question is: can they be sustained given the constraints, a key public sector player faces?

Air travel within India has traditionally been out of bounds to all except the well heeled and those who travel on business. This summer, however, there has been plenty of excitement with the two major airlines, Indian Airlines and Jet as well as Sahara trying to woo a larger section of travellers with low fares and promotional schemes.

More recently Air India has joined in, promising to offer the cheapest fares among all airlines on its domestic flights. All these suggest that the domestic air traveller is having a bonanza of choices and with it eminently affordable fares.

The hype over the promotional offers has been such that many genuinely believe that the airlines are beginning to undercut the Indian railways. In their view, traditional rail travellers who can afford AC II tier or other upper class travel may just as well opt for one or other of the airlines offering the discounted fares. Over time, airlines may wean away the upper class passengers<167,0p,1> of the IR, according to this view, which however appears as far-fetched as it was the first time.

Last year there was a similar excitement when the discounted fares were first introduced in India. In a sense air travel within India was beginning to resemble travel abroad what with the numerous pricing options. However, a majority of domestic passengers, not having been exposed to international travel, did not quite comprehend the rather onerous conditions that accompanied the new discounted fares. Tickets had to be reserved 3 to 4 weeks in advance. Stiff penalties, often going up to 50 per cent were levied on cancellation. Besides, none of the airlines was offering a significant number of seats, the proportion of such seats not exceeding a tenth of available capacity.

All those remain valid today even as the airlines try to go one up with their high voltage promotions. Not surprising therefore that many people believe that the Indian air passengers have never had it so good. It will take a while before the reality sinks it. For all their appeal the latest round of promotions does not usher in an age of cheap air travel in the domestic sector. Its relevance to a majority of passengers may not outlast the current lean summer months. In the ultimate analysis the decision to offer cheaper fares is a commercial one and whether it is going to be a success will depend on some of the following:

One, flexibility in the pricing of airline tickets is the major change that came about last year. This is a commercial decision inasmuch as the airlines are offering to fly passengers at a discounted fare. Without such an offer the seat might go empty. The principle is sound: airlines having a high fixed costs would try to cover their variable costs at lead through such "flexi'' pricing. Although conceptually correct, in practice it may be a daunting task to ensure the commercial viability simultaneously. It is an area that would have come under scrutiny if any one of the airlines had been publicly listed.

Two, the profitability aspects of the airline industry are important not just to the airlines but also to the public at large. The civil aviation policy now expected to be modified has been opaque and controversial. Only one new entrant, Jet could grow in stature, converting the previous IA monopoly into a duopoly. IA has for long been an unsuccessful candidate for divestment. Whatever be the political colour given to the opposition to its sale, the real reason for not disposing it of is seen in its financial performance. There have been no suitors.

Three, the question of a public sector enterprise continuing in a sector whose dynamics have inexorably been altered is a tantalising one. IA, the previous monopolist, faces a more nimble private sector competitor. In days to come other airlines, including Sahara will make a greater impact. The whole question is: does IA have the wherewithal to take on genuine competition? Flexible pricing may be the most visible facet, but there are other, graver issues involved.

The rationale of a public sector company acting either to protect its turf or extend the fight to newer territory is something that cannot be answered without reference to the inhibiting factors that go with government ownership. It is no coincidence that a recent CAG report has faulted IA's previous promotional schemes.

Of course, its private sector competitors do not have to face government audits or be subject to Central Vigilance Commission. Without altering the public sector character it is almost suicidal to let IA or other PSEs pretend that they have the same managerial autonomy and commercial sense to take on competition. There are in fact clearer messages in telecom, hotels and practically every other sector where a government company was once a monopolist.

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