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.