How Jet Airways acquired monopoly power in privatised Indian civil aviation

Jitender Bhargava in The Business Standard

It is generally agreed that Indian aviation has failed to achieve the potential that the country offers. Whilst most have attributed the industry's lack of robustness to unclear government policies, high operational costs, and so on, few have ever cited the role of private Indian carriers in influencing policies.

Since such instances haven't been tabulated, one is oblivious to the scale of havoc caused. If quantified, the financial loss alone would run into crores of rupees besides the harm it has caused to the industry.

Perhaps the first instance of blatant interference in getting a policy tweaked was when the entry into the sector of the Tatas and Singapore Airlines was blocked in 1997. The revised policy ensured that no foreign airline could invest in an Indian carrier even while Kuwait Airways and Gulf Air owned a 20 per cent stake each in Jet Airways. The revised policy also gave Jet Airways time to buy back the stakes.

A couple of years later when Tata-Singapore Airlines submitted a proposal to acquire a 40 per cent stake in Air India, mischief was again in evidence. Singapore Airlines was forced to opt out of the race citing opposition. The intent was clear: an existing airline did not want a strong competitor in a rejuvenated Tata-Singapore Airlines-managed Air India. Imagine: if a Tata-Singapore Airlines-managed Air India had indeed become a reality, taxpayers wouldn't have had to fund the national carrier's bailout at a cost of Rs 30,000 crore. Air India, under the new management, would also have been an airline to contend with and not what it has become today.

In the previous decade, the government, with Praful Patel as the civil aviation minister, saw the introduction of an irrational 5/20 policy. This helped only one private airline at that time and barred others who did not possess five years of domestic flying experience and a fleet of 20 aircraft from taking to international skies. The current aviation minister, Ashok Gajapati Raju, is now seeking to do away with it. For that particular airline, this policy meant a lot. It could for some years reap the advantage of being India's only international airline besides Air India, whose ethnic traffic it could encroach upon to fill up its flights.

If crony capitalism has been beneficial for some, it has also unwittingly taken a toll of at least one airline. The 5/20 policy was a contributing factor in financially crippling Kingfisher. In his quest to fly internationally without waiting to complete the requisite five years, Vijay Mallya bought over Air Deccan, which was soon becoming eligible for international operations, at a price that defied logic. Kingfisher Airlines eventually perished under the weight of debt.

Air India was often "forced" to withdraw flights from certain sectors by citing "economical unviability". It wasn't a coincidence to see a private airline mount flights soon thereafter with market and passengers offered on a platter by the obliging national carrier.

No less intriguing has been studied silence of private airlines when seats were being recklessly doled out to foreign airlines though the policy was destined to harm them too, not just Air India. And today, we have the situation of Indian carriers failing to make a mark on the international routes with foreign airlines not only having been given a head-start but also a stranglehold on Indian market. The promoters of Indian carriers simply ignored the question of how their fund-starved carriers would compete on their home turf with mega global carriers bestowed with disproportionate quantum of seats and flights.

The way the Jet Airways-Etihad agreement was facilitated was yet another instance of external factors influencing a decision. The government granted 37,000 additional seats to Abu Dhabi, over and above the existing 13,000 seats, to help Etihad acquire a 24 per cent stake in Jet Airways.

Even though other Indian airlines and airports, notably private-run airports at Delhi and Mumbai, realised how the Jet-Etihad combination and the accompanying huge quantum of seats would take away their business and harm their long-term interests, they did nothing except voicing concerns to the civil aviation ministry.

As if no lessons were needed to be learnt for putting the sector on track, some carriers have, in fact, facilitated their political masters' wrongdoing. When Gulf countries sought additional seats, some Indian carriers at the slightest prodding gave it in writing that they needed additional seats. This helped build a case for doling out seats to foreign carriers while the records showed that the ministry was only acquiescing to the requests of Indian carriers. These carriers haven't used a single additional seat so far.

The mess that we witness today is thus not only a consequence of flawed government policies but also constant meddling and complicit silence of some Indian carriers. Do they deserve sympathy for the poor financial state of their airlines? Perhaps not, given the harm they have caused to the industry.

How Indian aviation was destroyed

Kingshuk Nag in Times of India

Have you read the history of India? If you have, you must be familiar with the conflict of the English and the French on the Indian soil in the 18th century. The fight was to seize control over the Indian markets. Now in an encore of sorts, two airlines from the Gulf region, but belonging to different sultans, are fighting for control of the Indian aviation sector. Help may have come to them, maybe inadvertently, from civil aviation minister Ajit Singh and former civil aviation mantra Praful Patel.

Ajit Singh is in the news these days for trying to ram down the Jet-Eithad deal, through which this Abu Dhabi-based airline will get access to the lucrative Indian market (Indian passengers going abroad) and enable the airline to boost its revenue.

The deal is being looked into, with the Prime Minister’s office having raised some objections, but Ajit is confident of pushing through the deal and has even called on the UPA chairperson Sonia Gandhi to explain everything to her.

The deal was preceded by something unusual: at the end of April, the GOI (which means the civil aviation ministry, which essentially means Ajit Singh) suddenly increased the traffic rights with Abu Dhabi (number of passengers who could fly to Abu Dhabi from India through Indian carriers) to 36,670 per week. This raised eyebrows – including that of the Parliamentary standing committee on transport, tourism and culture which wondered why flying rights were being extended because Indian carriers did not have the capacity (in terms of fleet) to carry these many passengers per week to Abu Dhabi from India. But now with the benefit of hindsight, we are wiser. Under the Jet-Etihad deal, the latter company took up 24 per cent stake in Jet Airways. Incidentally, the Abu Dhabi-based company paid a premium of 32 per cent to acquire these shares. Although Jet will get Rs 8,574 crore in foreign investment due to this deal, analysts aver that the deal has clauses which will in effect turn over the management of the company to Etihad. Thus Etihad will ride piggy back on Jet to transport Indians.

Ajit Singh’s piloting the Etihad deal will have the effect of enabling it to catch up with Emirates Airlines (the official airlines of the UAE). Emirates Airlines dominates the market to the Gulf with 30 per cent of the passengers flying out of India to that area using Emirates to go there. Now Etihad will get a chance to capture part of this traffic and provide stiff competition to Emirates Airlines.

For those not well-versed with aviation matters, the fight between Emirates Airlines and Etihad will not be just for traffic from India to the Gulf but also for onward traffic to Europe and North America. Readers may have noted that a decade ago when Indians went to Europe and North America they often changed flights at Frankfurt. But nowadays, passengers mostly change flights at Dubai. Why? Because Dubai is the hub of the Emirates Airlines and this airlines flies passengers out to Dubai, from where they board onward flights to Europe and North America. This brings enormous business not only to Emirates Airlines but also to Dubai as a place (reason: duty free purchases at the airport and some passengers taking a break in Dubai for a few days, etc). Now within a year or so, Indian passengers will also fly through Abu Dhabi for their journey to Europe or North America and benefit the economy of Abu Dhabi. It is obvious that with its small population: the middle-east market (that is, local origin or Arab passengers flying out of the middle-east) cannot help to create mega hubs for neither Emirates Airlines at Dubai or Etihad at Abu Dhabi and bring tremendous benefits for their respective economies. Both of them can only grow if they can exploit the huge Indian traffic that flies from India to the Gulf and to Europe and North America.

Ajit Singh’s action may have the effect of providing level playing field for Abu Dhabi-vis-a-vis Emirates  But the man whose actions resulted in out of the ordinary benefits to Emirates was Praful Patel, who was civil aviation minister for seven years from May 2004 to January 2011. He is the man whose tenure, analysts say, saw the beginning of destruction of the Indian aviation sector. This is even as Emirates got empowered and Dubai became a global hub.

When Praful came to the civil aviation ministry with the formation of the UPA government, Air India was the market leader in India with 42 per cent market share. A proposal had been mooted by the earlier NDA government to augment the fleet of Air India by 28 but the deal had not been finalized. When the proposal came to Praful he raised the numbers to 68 with one stroke of the pen and raised the cost to Rs 50,000 crore. All this was done without any revenue plan or even a route map to deploy so many additional aircraft. The beneficiary was Boeing from whom 27 Dreamliners were proposed to be bought. The Dreamliner was then only on the drawing board. The additional secretary and financial adviser in the civil aviation ministry V Subramanian opposed the move but he was shunted off. Analysts also questioned why an airline with a turnover of Rs 7,000 crore should place orders of Rs 50,000 crore with no idea of how to use the planes. This would only put a huge debt burden on the airline and damage it badly. Interestingly the Comptroller and Auditor General (CAG), which looked at the deal later, reported: “The acquisition appears to be supply driven ... the increase in number does not withstand audit scrutiny, considering the market requirement ... or forecast of the future, also the commercial viability projected to justify the acquisition...”

Caught on the wrong foot due to this acquisition, Patel did something else which virtually rang the death knell for Air India. He merged Air India and Indian Airlines arguing that this would create a much larger aviation entity that could compete better and also utilize the new aircraft which had been ordered. But in the event, this has had the effect of creating a monstrosity and mounting losses. Even today the new entity – which is called Air India – is plagued by severe HR problems arising out of the merger.

As if this was not enough, the airline was forced to vacate (no one till day knows why) its lucrative routes where foreign airlines and even airlines like Jet stepped in. As a good example, in October 2009, Air India decided to opt out of the Kozhikode-Doha-Bahrain route. This was one of the highest-revenue-earning flights of the airline and it was a route which was 511 seats short per week. No reasons were given for the withdrawal and in a short while foreign airlines moved in to exploit the readymade market. The airline’s unions protested but to no effect. Interestingly as early as May 2005 in a confidential memo to the cabinet secretary, the then managing director of Indian Airlines (the merger had not taken place then) complained that the Indian Airlines was being forced by the civil aviation minister and his officer on special duty to take financially damaging and commercially unviable decisions. These included forcing IA to make way for other operators. The MD said that he was forced to seek flight slots for the airlines in the UK and USA during the winter schedule (when traffic was lesser) even as other airlines were allowed to fly to the destinations in summer. Nothing came of the complaints: the managing director made way but the minister continued.

Now we have come to a position that Air India is all but dead, groaning under a massive debt burden and huge losses. Air India has thus ceased to be a player and foreign airlines have captured the Indian skies. This is not the end of the story: with the actions of the Indian ministers resulting in establishment of aviation hubs in Dubai and Abu Dhabi, Indian airport operators are unhappy and rightly so. GVK and GMR, which operate airports in Mumbai and Delhi respectively, wonder why the airports in the two cities cannot be built as hubs. After all the entire Indian traffic that is going to the west through the middle-east can easily be sent to the final destinations through Mumbai or Delhi, if hubs are developed there. This is especially because the long-haul Dreamliner planes are now being inducted into the fleet of Air India. These planes can fly nonstop to any part of the globe. In this way they are a threat to the concept of mid way hubs.

For those who may not be aware, Praful Patel, who represents the Nationalist Congress Party (NCP), comes from a beedi-manufacturing family. After his father died, Patel a product of Campion School and Sydenham College in Mumbai, took over the business and expanded it. The Mumbai schooling made him savvy, running the business from a young age made him street smart. He is popularly known as the beedi king of India.The family company, Ceejay group, rolls over 60 million beedi sticks a year. The beedi leaves are grown in central India, and Patel’s constituency in Bhandara-Gondia although in Maharashtra is not far from Chhattisgarh. Praful Patel’s father also doubled up as a politician and the son followed in his footsteps becoming an MP for the first time in 1991. The UPA government being a coalition government, Patel’s actions were tolerated for a long time. But in the end he was removed and pushed to the heavy industry ministry as full-fledged cabinet minister. All the while in the civil aviation ministry Patel, now 56, was a minister of state but with independent charge.

Seventy-four-year-old Jat leader Ajit Singh is the son of former Prime Minister Charan Singh. A product of IIT Kharagpur, Ajit worked in IBM in the US for 17 years before returning to India and jumping into politics. His Indian National Lok Dal (INLD) – with 5 MPs – became part of the UPA in 2011 and shortly thereafter he was made civil aviation minister.