Is the sky falling down on the aviation sector?

We all fall down ?

You don’t have to follow Vijay Mallya’s tweets to know that the aviation sector is in trouble.  There is trouble brewing everywhere in the industry which had shown great signs of promise since the liberalization of the sector in 2003.

Let’s look at the state owned Air India first.  Sometimes I watch things on the news and I hear Ron Paul’s words ringing in my head. I don’t even believe in his kind of economics, but the state of the public sector in India is such that sometimes you’d think even a homeopathic dilution of the kind of libertarian thoughts I see around me now would be a welcome change in the scenario.

I am looking at Air India’s financial statements as I speak, and really folks it is not all about high fuel prices , what I have with me is the Annual Report from 2009-10. I do not know why later versions are not available on the site.

This is a quote from the annual report for 09-10, which makes it clear that the problems run deeper than high fuel prices. It is mismanagement coupled with deception.

“Operating expenses declined by Rs 23,157.8 million due to a decrease in fuel prices by 29%”

They go on to say how this and other declines in operating expenses were offset by increases in expenses largely due to interest paid on newly acquired aircrafts and borrowings for working capital.

It’s true that fuel prices have since shot up, but it is also clear that while fuel prices are exacerbating Air India’s problem, they are also serving as a carpet under which more endemic defects are being swept under.

Attached with the Annual report is the Comptroller and Auditor General Review of the Annual Report.  Back in 2010, the CAGR has stated that AIR India understated their losses by around 54 percent. A couple of instances have been highlighted by the Auditor.

1)      Air India has been recording its maintenance expense as prepaid expense. That is, the lump sum the company pays for maintenance is recognized as expenditure and deducted from the revenue only when the maintenance work is actually carried out. While this may seem fair at the first glance, the auditor points out that as the need for maintenance is accrued for the hours already flown by the aircrafts, and not when the work is actually carried out. This is an expenditure that has already occurred and should be recorded as such.

2)      Deferred Tax Assets – These are assets which would be recognized as tax credits on future income, but to claim them as assets, there has to be a possibility of taxation in the future, that is the company should have some profits in the future which are taxable. There was no reason to believe that such profits would arise making the entire deferred tax assets phony.

Which brings us to the question of why the government is in the business of running an airplane business in the first place? Many arguments are being made including one that Air India connects remote areas of the country which private operatory wouldn’t cover.

Does such coverage have to come at the expense of huge losses to the tax payer? Does the entire badly managed business which has never known how to survive any kind of competition let alone the fierce competition seen in the civil aviation sector today have to maintained for this purpose? If a certain route is indeed that important, wouldn’t subsidizing a private player to fly that route be more efficient an idea? About the employment Air India generates, remember that the employees haven’t been paid for over quarter of a year now. How long are these operations going to be maintained on the shoulders of a purely welfare claim which also they fall short to achieve?

Looking at the entire market place, we see that it isn’t just the public sector but also the private sector which is in trouble.  Since the liberalization in 2003, which allowed private players in civil aviation, competition in the sector has been intense, with each player looking out for itself by slashing prices despite rising fuel prices and vying for the most profitable routes (except Air India ? )

Air India does not have the same incentives to maintain profitability as the private sector has, so it isn’t surprising that the government has been accused of pulling Air India out of profitable routes and allowing the private sector airlines to fly them. If there is no incentive to run a profitable business, why run it at all? Just for a few under the table deals and kickbacks that the collusive moves provide to someone high up in the bureaucracy? The tax payer money being lost here, in all probability belongs to an honest lower middle class Indian who may never even see the skies from the comfort of a plane seat.

Kingfisher’s troubles are a well-known fact. A luxury airplane in a price sensitive economy where competition was driving abnormal profits to zero! I guess nobody cared about in-flight entertainment or ‘personally selected’ airhostesses for their two-three hour flights; they just wanted to get going at a low price.  The highly leveraged buy-out of Air Deccan to create simultaneous low-cost operations did not work out too well either. It was badly timed with competition from Jet which acquired Air Sahara, sky rocketing fuel prices and the 2008 recession which did not bode well for any of the players. Indigo has stood through in this environment as a lone example of success, driven by well thought of strategic decisions in fleet acquirement and slow and steady expansion into the market. These however are examples of a competitive market doing what it does best, rewarding better decision making. What Air India which doesn’t even pretend to be interested in a profit is doing flying around with these players is beyond me.

Also why are taxes on fuel as high as thirty percent with an additional surcharge when the sector is clearly struggling? Why is Foreign Direct Investment ok in retail but not in aviation? It is easier to see why FDI in aviation would be a good thing. Another area worth looking into would be the high charges paid by carriers for using airport facilities.  Unless the private sector is given the leeway it requires, the liberalization of the aviation sector may come to nothing and people will once again be faced with air travel being a luxury for the very rich.

 

Neta gets a CBI probe.

Man! If anybody in India should be hiring right now, its the CBI! With all the demands for ‘probing’ questionable people,they sure need a lot of hands on the job (or whatever). I don’t envy them guys. Seriously do you fancy ‘probing’ Janardan Reddy? No, no guys the quotes on probe was just a typo. I don’t mean anything like.. THIS!

Well if you wanna gold plate your toilets by stealing away India’s iron ore, I would definitely want you probed, in every way possible! Some of the other demands aren’t so reasonable though, Swami Agnivesh wants to probe Kiran Bedi! Eeks sorry, I meant he wants the CBI to probe her, why ? Because she traveled economy instead of business class and donated the rest of the money to charity! For Pete’s sake they were willing to fly her business class and she could have done that happily without threats of ‘probes’.

While all the noise was being made about Prashant Bhushan exercising his freedom of speech and ‘rightfully’ according to the ‘right’wingers getting beaten up for it, there was a custodial death in JnK. The family of Haeed Sajeed Yusuf, National Congress worker who mysteriously died in custody is demanding a CBI probe. Go for it people, if JnK is a part of India, which it most definitely is! we need to start acting like it and show some concern. (Damn how do you mix seriousness and satire and make sure people get your point? I need a writing class.) Probe on brave CBI.

Lets swing down south to Kerala, Kerala may soon need a CBI all of their own. They need to probe a lot of stuff. Their chief minister famous for being ‘transparent’, no guys im not talking about the ‘mundu’, and girls dont pretend you haven’t tried to stare through the fine Kerala cloth which makes the men’s lower garment and enable ready fold-ups for shows of manliness. I am talking about his webcam on mute on all day long in his office, even when the lights were off or he was out and all you could see was his honorable chair. Yes all his office proceedings were live streamed on camera, I did mention the conversation was muted did I not? Well he seems to have ordered some expensive pollution control equipment for a Titanium plant which the next Left government left around lying unused. The CBI has to probe again!

Kerala also has a case of a 47 year old teacher who was brutally murdered for some reason. Omg people why are you murdering teachers now ? guaranteed that assignment sucks, but knock it off! Okay its not funny and there is no indication that his students played a part, so the CBI has to probe! Do the CBI probe all murders ? Or is it only when the opposition threatens to stall the house?

Jairam Ramesh dares Mayawati to recommend a CBI probe into the embezzlement of MGNREGA funds, jesus Mr Ramesh she wanted a probe into the bees in her rally, shes brave enough to probe anything before they probe her!

Well the CBI has the entire 2G scam and Kalmadi to deal with, Tihar is full of VIPs waiting to be probed, and there is Yeddy in Hyderabad. I pity the CBI. Hats off to them too, for all that they are dealing with and unearthing. Section 377s repeal , Anna Hazare’s movement, well CBI, you can expect a lot more probing in India now 😉

 

Inflation and the Indian dream

For a long time now, India has taken pride in being largely insulated from the global economic slowdown. True, Indian exports suffered, but it was also an opportunity for the exporters, especially software firms to diversify into markets other than the north american markets. India Inc was still hiring during the worst of the crisis. The Reserve Bank of India had a broad smile as the merit of years of regulation of the financial markets once thought of as unnecessary chaining of the economy was now vindicated. There wouldn’t be a sub-prime type crisis in India, despite exposures to North American markets India was still strong. Growth would not be badly affected. Then came news of the European slowdown and suddenly nobody was too sure anymore, India wasn’t going to stay immune to the global slowdown forever.
Indian growth is now at 7.7 percent. On an absolute scale a wonderful number, but not enough for the young nation to grow out of poverty. The RBI is not optimisitic.

However, can we blame the Indian slow down on international markets ? No doubt international effects are being felt in India, but it would be very dangerous to brush aside serious defects in the home economy by pointing the finger at the outside world. For one, Indian exports have been gaining momentum despite these slowdowns. New markets are being found in West Asia, Africa and South America. What is the problem then ? The answer is Inflation.
No, The RBI is not printing a lot of cash to fund government expenditure, infact the opposite is happeneing, monetary policy being followed is pretty tight. Where does the problem lie then ?
Maybe the traditional women of India who still do the bulk of the cooking will have an answer before the ones who meddle about with economics. The prices of commodities are increasing. India is suffering from severe supply side bottle necks. We must realize that despite everything that happened from the 1990s, India still has a large agrarian economy. A media or a middle class that ignores this fact doesn’t make it go away. The manufacturing sector too is ignored while focusing on the services boom. Growth has been dull in both these sectors. Food prices keep increasing, especially basic vegetables most used by the Indian middle class. India needs to wake up to the harsh reality that so much of its economy directly depends on the monsoons! Structural reform in agriculture and also manufacturing is what is required. Tighter monetary policy is what we get.
All economists agree that in the long run money is not a part of the real economy. Agreed short term monetary policy is essential, but what is the use if we do not combine it with a long run vision of improving the underlying problem ?
Demand is another key issue, demand has been increasing in India ever since the middle class got richer. This includes the demand for food. More Indians eat out today than ever before. Rising tomato prices havent stopped Bangalore from having a Tomatina of its own. Population doesn’t decrease either, neither does agricultural land increase. Monetary policy is not magic to solve a long term issue though it may ameliorate the temporary warning signals.
Bangalore needs to realize its a part of India, fed by Indian farmers.
I am totally for a booming service sector, but keeping in mind what is needed in the ground level to sustain it.