Civil Aviation in India

India mulls over 49% overseas share in airlinesBy Raja Murthy

MUMBAI - The Indian government on April 12 postponed to this week an eagerly awaited decision to allow foreign airlines own up to 49% stake in Indian carriers. But overseas funding alone is unlikely to rescue India’s struggling US$12 billion civil aviation industry.

It's more a case of mismanaged potential that has caused five out of the six Indian carriers, except Indigo, to have accumulated losses of nearly $2 billion in the past two years. India, the world's ninth largest civil aviation market, had passenger traffic doubling  to over 150 million in 2011, from about 73 million in 2005-06.

India aims to be among the world's top three aviation markets within a decade. In between are mountains to climb and some strange oddities to correct - such as building multi-billion dollar luxury airports in an industry dominated by low-cost airlines.

The foreign direct investment (FDI) move, if it materializes as part of the mountain climbing process, could give desperately needed survival cash and breathing time to nearly dead flying companies like Kingfisher Airlines. The Vijay Mallya-promoted carrier is drowning in a debt of $1.3 billion, with no new loans forthcoming, with over 60% of its aircraft fleet grounded and its employees receiving salaries for December 2011 only on April 9.

The state-owned carrier Air India has similar mismanagement woes, but continues to receive public money to bankroll it. On April 12, the government approved 300 billion rupees (US$5.7 billion) as bailout and part of a revival plan for Air India across the next eight years. This after Civil Aviation minister Ajit Singh informed parliament that Air India incurs losses of $1.9 million every day, or over $700 million annually.

Whether Air India would fare better without government ownership is as moot a question as whether more funding, including FDI, could only be more investment down the drain. Waiting to be surgically treated are roots of the problem such as unviable operating costs for airlines.

Unfairly high taxes on aviation fuel have long been a major complaint for India's airline industry. Aviation Turbine Fuel (ATF) continues to be over 50% costlier in India than in Singapore and Malaysia. Fuel costs contribute about 45% of the operational costs of India's airlines.

Yet India's state-owned oil companies sell jet fuel cheaper to international airlines than for domestic flights in Indian airports. Indian Oil, for instance, sells jet fuel at $1,010 per kilo liter for international airlines in Mumbai (March 1, 2012 prices), while domestic airlines pay a pre-tax cost of $1,316.77. International airlines are free from sales tax on aviation fuel, while domestic airlines pay an additional 26% sales tax that local state governments levy.

Instead of the obvious step of reducing aviation fuel taxes to reasonable levels - or to only at least 25% above international levels - the Indian government earlier this year allowed domestic airlines to directly import aviation fuel. That seems as bizarre as asking an impoverished dying patient to go overseas to buy medicine available down the street.

Even more peculiar is that India exports nearly half its production of aviation fuel. According to Ministry of Petroleum data, India exported 4.478 million tonnes of aviation fuel in 2010-2011, out of total aviation fuel production of 9.570 million tonnes,

Fuel costs are only part of the problem. Aviation infrastructure growth appears heading in a direction different from requirements for industry growth. Privatization of metropolitan airports, for instance, resulted in multi-billion dollar upgrades for the Mumbai and Delhi airports, and new airports for Bangalore and Hyderabad. The impressive new airports though are driving up operational costs for a budget airline industry that critically needs low-cost infrastructure.

The spectacular new Terminal 3 of New Delhi's is itself both solution and problem. Built and operated by the Delhi International Airport (P) Ltd (DIAL) - a joint venture consortium of global infrastructure company GMR Group, Airports Authority of India, Fraport and Malaysia Airports Holdings Berhad - Terminal 3 makes Indira Gandhi International Airport (IGI) one of Asia's largest public buildings and the world's second-largest integrated airport, after Beijing Capital International Airport.

The $6 billion Terminal 3, spread along 4 kilometers and with a roof area of 45 acres (18.2 hectares), serves as future investment for Delhi having the world's fastest growing airport passenger traffic. According to the Montreal-based Airport Councils International, Delhi registered passenger traffic growth of 21.77%, faster than Jakarta's 19.2% and Bangkok's 12% growth. This compares impressively to the 1.8% air passenger traffic growth in North America.

But India's airlines and passengers are being asked to pay more airport fees and taxes to recover the multi-billion dollar costs for the new airports. Both Air India and Kingfisher Airlines alone owe the Delhi airport $100.4 million in airport fees. So airport employees are also suffering salary delays.

International carriers are too feeling the pinch. Malaysia's Air Asia, the continent's leading budget airline, announced termination of its flights out of the Delhi and Mumbai airports from March 24 this year, citing excessively high airport and handling fees and aviation fuel costs at these airports. Air Asia continues to fly from five other cities in South India.

The Airports Economic Regulatory Authority has proposed a 280% increase in landing and parking charges at Delhi airport, while the airport operator DIAL wants a 700% increase. Not just low-cost airlines, but Lufthansa, Air France, KLM and British Airways have announced putting on hold expansion plans in India due to the huge hike in operational fees at IGI Terminal 3.

Such headaches were not quite anticipated when an Air Deccan 48-seater ATR turbo-prop aircraft took off from Hyderabad to Vijayawada on September 26, 2003, to unofficially launch low-cost airlines in India. Since then, a heavily loss-making Air Deccan was bought by Kingfisher in 2007, and now a heavily loss-making Kingfisher is looking to sell itself to a foreign carrier.

The pending 49% FDI decision on the governmental anvil is actually a throwback to over six decades ago. In 1951, the government bought a 49% stake in Air India, founded and owned by the Tata Group. The government retained an option to buy another 2% stake and became owner. It did so under the Air Corporations Act of 25 August 1953 that nationalized all private airlines.

Air travel was booming in India in the 1950s, with cheaply available World War II surplus aircraft and India having bountiful skilled air pilots and maintenance crews after the war. The 26-page "Official Airline Guide" of July 1952, published by the Air Transport Association of India, lists schedules for about nine domestic airlines: Air India Ltd (also called The Tata Airline), the Air Services of India (also called the Scindia Airline), Airways (India) Ltd, Bharat Airways (also called the Birla Airline), Deccan Airways, Himalayan Aviation, the Indian National Airways, Kalinga Airlines and Air India International.

In 1953, India had over 20 private airlines, with unstructured growth without proper infrastructure creating market problems similar to the current woes of some domestic airlines. JRD Tata (1904-1993), called the father of civil aviation in the subcontinent, predicated an industry disaster. One of the reasons why the government nationalized the entire airline industry in 1953 was apparently to ward off many private airlines going bankrupt.

Now with Air India saved from bankruptcy with a $5.7 billion gift of public money, the government may as well consider re-privatizing Air India, and selling 49% of the stock back to its original owners the Tata Group.

The $5.7 billion bailout and the 49% FDI decision for overseas investors have better chances of working only if the government ensures there being low-cost operational costs to support low-cost air travel.

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To secure credit, Europe finds global financial markets no longer attuned to Western interests

Joergen Oerstroem Moeller 

The eurozone crisis has not only raised questions about the viability of the common currency, but could also jeopardize an economic model that has so far reigned supreme. The course taken to resolve the crisis in Europe will have long-term impact on the most vibrant parts of the world – from Asia to Latin America.

In developed countries of the West, debtors have run up a high debt ratio to gross domestic product, even while economic growth was high – overspending when they should have saved. They borrowed to spend more, demonstrating a disastrous failure to grasp basic economic principles as well as flaws in moral behaviour and ethical judgment. Among these borrowers are established heavyweights – the United States, most European nations and Japan. The United States, one of the wealthiest countries, became an importer of capital instead of exporting capital, registering its last balance vis-à-vis the rest of the world in 1991.

After accumulating savings over several decades through prudent and cautious policies, the creditors sit on a large pile of reserves with low domestic debt and government deficits. These reserves are largely held by emerging countries with China at the forefront. As a paradox, the emerging economies have taken it upon themselves to lend to the richer countries – exporting capital almost as vendor’s credit. Indeed, this reversal of roles is one explanation for the global financial crisis. The global monetary system is not geared to function under such circumstances.

This development was framed by the so-called Washington Consensus of the 1980s – a neoliberal formula that spurred globalisation by promoting liberalization of trade, interest rates and foreign direct investment; privatisation and deregulation; as well as competitive exchange rates and fiscal discipline. Fundamental flaws were exposed, raising the question about which economic model might replace it.

There are two possibilities in this competition: One strategy is from the United States and a group of Democrats who suggest that more short-term borrowing and spending could lead to growth, tax revenues and exit from recession – even if the debt grows and deficits become permanent. A breakthrough by the US Congressional super-committee to make substantial cuts over the next 10 years won’t fundamentally change this stance, merely reducing rather than eliminating the deficit. The Europeans have taken the opposite view: They advocate starting the recovery by reducing deficits and debt even if that seems counterproductive for economic growth in the short run. The Europeans are also raising taxes across the board, regarded as indispensable for restoring balance in government budgets.

The results of either plan won’t be known for a few years. Chances are, however, that the European policy will carry the day for the simple reason that creditors call the tune. It’s highly unlikely that creditors favour continued reliance on deficits as the inevitable consequence will be inflation, eroding the purchasing power of their reserves. Indeed, the Chinese rating agency Dagong has announced that it may cut the US sovereign rating for the second time since August if the US conducts a third round of quantitative easing.

Early in the crisis, as Europe set up a stabilizing bailout fund, there were rumours in the market that China, Russia and Japan might rescue of the euro, either by buying European bonds or going through the International Monetary Fund. It’s unclear how China wants to proceed with such an undertaking, but Russia and Japan have allegedly acted to do that through the International Monetary Fund or by buying European bonds.

Countries with surpluses do not dream of rescuing the euro; they act in their own interest. Economically they prefer the European fiscal discipline, reasoning that American prodigality will shift much burden of adjustment onto them. They may dread being left with the US dollar as the only major international currency, forcing them to endure, at times, whimsical policy decisions by the Federal Reserve System, the US Treasury Department or US Congress. The euro and the European Union are seen, and indeed needed, as a counterweight. The EU may look weak, but it’s a respectable global partner, offering the euro as an alternative to the dollar and serving as a major player in trade negotiations and the debate about global warming, just to mention a few examples.

It can be expected that other nations will step forward to support the euro. But at what price? What conditions, if any, will be put on the table and will the Europeans consent? A case can be made that, as creditors undertake investments to help the euro, they actually help themselves, and there are no reasons why the eurozone should pay any price. We can expect a game of hardball, in which nerves matters, and who gives what to whom may not be clear at all.

Another question has arisen about who decides and who is in charge. The G20 meeting in Cannes revealed a growing consensus to stop the financial houses amassing and subsequently abusing power. If the global financial system is big enough to force Italy into a default-like situation, many countries are surely asking whether they’ll be next. The big financial houses are viewed by many as irresponsible stakeholders, if stakeholders at all. Consider, the US government is suing 18 banks for selling US$ 200 billion in toxic mortgage-backed securities to government-sponsored firms, the Federal National Mortgage Association and the Federal Home Mortgage Corporation, known as Fannie Mae and Freddie Mac. In April 2011 the European Commission initiated investigations into activities of 16 banks suspected of collusion or abuse of possible collective dominance in a segment of the market for financial derivatives.

The market has muscled its way in as judge about whether a country’s political system or economic policy are good enough. But the market is neither a single institution nor a broad, balanced mix of diverse players. It’s become a small group of large financial institutions, the power of which overwhelm what even big countries can muster: 147 institutions directly or indirectly control 40 percent of global revenue among private corporations. A sore point is that they pursue profits without concern over implications for countries and societies. Rather than let measures work, these financiers force the issue here and now, even as they speculate against efforts, many admittedly delayed and inadequate, to resolve debt crises. Financial institutions holding sovereign bonds that could default insure themselves by buying a credit default swaps. What seems like prudent corporate governance becomes a shell game as these obligations are traded among financial institutions, some of which don’t hold sovereign bonds in their portfolios – all of which heightens interest in forcing default.

The temptation to roll back economic globalisation inter alia by breaking up the eurozone or restricting capital movements has been resisted. Economic globalisation is holding firm.

Creditor countries can set the course on future economic policies – likely highlighting fiscal discipline. While the West had vested interest in the big financial houses, the incoming paymasters do not, and they can be expected to increase their control over investment patterns. This can be done either by setting up own financial houses or buying into Western financial institutions as was the case in the slipstream of the 2008 global debt crisis.

The global financial market is changing course, away from looking after Western interests and acting in accordance with corporate governance as defined by the West toward a more global outlook guided by the interests of new group of creditors.

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Joergen Oerstroem Moeller is a visiting senior research fellow, Institute of Southeast Asian Studies, Singapore, and adjunct professor, Singapore Management University and Copenhagen Business School.