Saturday, 1 August 2009

Private Airlines in India - A case of Market failure

Yesterday, under the leadership of showman Vijay Mallya, the Federation of Indian Airlines (FIA) ratcheted up the pressure on the Indian government to help these private airlines to avoid the consequence of unpaid bills and loans. They threatened a day's strike on 18 August and promised more of more to come; in an attempt to browbeat the Indian government. If the FIA wins, it will be one more instance of 'privatisation of profits and socialization of costs'.

On the CNN-IBN news programme at six pm last evening, an expert mentioned that most of these private airlines were offering flight tickets at $60 when the actual cost to the airline was $ 100. These lower fares may have been a part of the price penetration strategy that is taught at business schools. The beneficiaries of such a strategy are the new entrant airlines and the passengers that availed of this freebie. The moot question therefore is why should the majority of Indians bail out this minority group when none of them have obtained any benefits of the profusion of loss making airlines.

In a free market, a firm that makes losses will quit the market thereby lowering supply and will raise prices resulting in better bottom lines for the survivors. Why is this basic principle of the market being ignored by Mallya and co? It is because in India the FIA believes they can bully the pliant government to support their profligate ways. Praful Patel, the civil aviation minister, himself has not been a neutral arbiter in the civil aviation industry, acceding to arbitrary rules that supported incumbent airlines.

I think the private airlines should not be offered any handout other than what they have obtained so far. If they go bust, so be it and India may have a better civil aviation industry.

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