Battle #6: India needs more than six airlines: IIM Trichy – FOR: Counter punch by Delhi School of Economics

June 12th 2014? Didn’t know what happened that day. Did Air Asia start its operations in India on that day? Good for them. What’s in it for us? Well of course the ticket prices were insanely low. But that happened only for a while. It was just a cheap market penetration strategy. If you go to the Air Asia website now to check the rates, they are similar to that of Go Air, Indigo or Spicejet.

Image source: http://usa.chinadaily.com.cn/business/2011-05/20/content_12549076.htm
Image source: http://usa.chinadaily.com.cn/business/2011-05/20/content_12549076.htm

 

After reading the “whole” article we were actually  shocked to find such a loyal set of supporters of our thought process — even they think that the Government  has to take many steps and the introduction of the new airlines are not just going to solve the problems of the aviation sector

As we hear from Tony Fernandes, Founder, AirAsia India, there is plenty of the “pie” that can be catered to by the existing and new airline operators. However, he expresses caution about a lot of government pending actions which highlights the dependency of this sector on administrative regulations.

The opposition has mentioned a few problems like:

1.      Increase in fuel uptake at an airport due to lower cost – well yes of course, and the price of fuel, that will add to the problems.

2.     Air traffic increase due to lower ticket prices- we have been dealing with this problem for quite a while, I wonder what will happen when the number of aircrafts will increase.

3.     Incentives for more airlines to enter the market, thus making the industry more competitive – see from a customer point of view it’s not going to matter. All they want is to travel at the lowest price and yes indeed to survive the competition they have to lower the price.

4.    Increased employment & revenues – it really will help in increasing employment & revenues but let’s keep our fingers crossed coz we never know when something like ‘Kingfisher failure’ can happen.

After seeing these lines I had to go back and check my mail. I mean, I didn’t know whether we were against the motion or they were because if the new airlines are dependent on government norms, the old airlines are also dependent on the same; and they can also do well provided they improve upon certain things; or otherwise the deep pockets with which the new airlines will come to India will also get exhausted after a certain period.

It has been said that the introduction of the new airlines will make the power shift from the airlines to the passengers’ hands.

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Image source: www.jantoo.com

I suppose my learned friends are ignoring possible situations where even 14-15 in place of 7-8 airlines can form an unholy nexus and artificially raise air-prices by stimulating artificial demands. History was witnessed many such affairs and it’s highly probable such a situation can arise again. So the solution to this cannot be introduction of a meager number of airlines for sure.

The author(s) claimed that, ‘more the competitors, the more a firm would have to work to improve quality of their product or service’. Yes we all know this, but we are not selling toothpastes here. It’s not about quality or service. Anyone who has experienced Air India’s Boeing 787 dreamliner would totally understand the outstanding quality which our aviation industry is capable of. The Indian Aviation industry is not at all a piece of cake. Air India showed record profit in 2004-05 and suddenly after 2 yrs it’s been in a constant state of loss since 2007. And can we ever forget the downfall of Kingfisher airlines?

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Somewhere in the article we find that the abolition of the 5/20 principle is going to do a world of good as they will free the airlines from the shackles of exploring unexplored territories.

When even the 5/20 role was not enough deterrent for airlines such as Kingfisher Airlines who spent five years first in India ; to fare disastrously in the rest of the globe; how  can abolishing the rule prove to be better for the sector.Some experience is definitely needed before foraying into the unknown.

We also come to know from the article that higher competition would lead to improvements in service times, plane utilization and lower operating expenses.

Lower operating expenses!!! Was that a joke? As per as our understanding operating expenses depend on fuel (ATF) costs and the efficiency of the flights mostly. How can new airlines bring in improvement in that certain arena which the old ones cannot? Even to the best of our knowledge the new players cannot even change the taxation regime of the Government on which costs greatly depend.

Again in the article we find – Airport developers can now draw on wider revenue opportunities such as retail, advertising and vehicle parking with the growth in airlines and subsequent burgeoning traffic. This would also help spread some of the airport charges across the operators.

The same can be done even in case of the existing airlines .Who needs more airlines for them?

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The argument – “The reason being that the industry is still fairly nascent in the country and it has a long way to go before consolidation actually takes place” also seems invalid to us.

Do you really call an aviation system which started in 1953 as nascent? If consolidation and profit making will take time how can Indigo record profits operating in the same arena and utilizing things to the utmost?

And here comes the mother of all arguments. Please have a closer look at this….

If it leads to the closure of existing players that cannot compete, that is the basis on which modern capitalist theory is based.

So what do we want? Do we want to witness again the crying faces of the workers who will lose their jobs or the distressed condition of their families who will be helplessly left alone as we saw in the case of Kingfisher Airlines? Can’t we just solve the problems associated with it rather than introducing new players?

It is easier to run away from a problem but it is really difficult to face it and win over it… and thus the later one is called a “HERO” and the former one a “COWARD”.

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College: MBA(IB), Dept. of Commerce, Delhi School of Economics

Team Mate: Ashish Verma and Anurag Ghosh

Team Name: Sublime Magicians

Comments

6 comments

subhash90

We agreed that there has to be a change in the government norms. But in addition to this, competition would only further increase cost pressure and force the existing as well as new airlines to optimize. Yes, unholy nexuses of 15 players are possible, but then this makes it much more difficult to form the nexus. Especially when the ones that generally do form the nexus are the ones that aren’t doing well. The ones that are or foresee that they can do well without forming such an alliance, why should they even bother? And artificially raise air prices by promoting artificial demand? Passengers would just take trains or buses instead, what purpose would it then serve?
If you honestly believe operating expenses can’t be further reduced, therein lies the biggest joke. Spirit Airlines, an ultra low cost carrier has been the most profitable airlines in the last 3 years or so. They have managed margins higher than any other low cost carrier of late by completely dispensing of frills. And while many customers complain about the poor customer service, their numbers speak for themselves. 40% more profit per plane than any other carrier in the country and the same market valuation as US Airways which has over 9 times as much traffic. How do they do this? Cheaper tickets and much lower costs per flight. So there is no question that there is still room for lower costs. If you doubt this, refer http://online.wsj.com/news/articles/SB10001424052702304749904577384383044911796

You say that growth in airlines can be managed by existing players. Sure. With losses all around, the existing airlines are just going to buy lots more planes, traffic is going to go up exponentially and the sector is going to grow at an alarming pace. Provided they don’t all go bankrupt by then, just ask Vijay Mallya.
1953? Before 1992, it wasn’t even an Industry. It was controlled by the government. It only allowed private players to invest after 1992 which is when the birth of the Indian aviation industry actually happened. And we thank you for recognizing that Indigo is recording profits. It flies in the face of your own argument – “How can new airlines bring in improvement in that certain arena which the old ones cannot?”. Consolidation and profitability are very different however. Indigo is making profits in a turbulent market with existing players coming and going every other year. The industry will only be mature when there are a few players, each with a sizeable and stable market share, regulations stop changing and each of these players are making profits. The only way that can happen however is when all the loss making, bankruptcy filing firms are out of the industry and the only way we see that happening is through the entry of competition in order to bring in global best practices and eventually streamline the industry.
Let me answer that emotional appeal with another one. These firms are all making losses anyway. Why would anyone invest in a sinking ship? The state the industry is in as of now, nobody is going to bring in the moolah to improve the conditions for these existing-failing players.The way we see it, not introducing competition is going to end up with us witnessing those same crying faces of families anyway. But at least more airlines gives them more jobs, leaves airlines scrambling to recruit the best talent and therefore gives those same crying faces a choice as to where to go and ultimately deliver more power in their hands leaving them with a brighter future.

Ashish Verma

Mr. Sanjeev, u said, “If you honestly believe operating expenses can’t be further reduced, therein lies the biggest joke.” Then why am i not laughing? well because you quoted an example of an American Airlines. This is India my friend and its been awhile since any airline has showed some good profit figures except for Indigo of course.
There is always a room for lower costs, duly noted, but whats next? social service, bankruptcy? Its a business sir and we need profits.

subhash90

The name’s Subhash*. Yes, I quoted an example of an American airlines. A country which, before the advent of deregulation in their transportation, in the early 70s faced the bankruptcy of the Penn Central railway which was then the largest bankruptcy in history. Why? Because of a hugely inefficient system which then only became profitable once privatisation and deregulation occurred. Why did this happen you ask? Because of competition coming in and forcing existing players to get into gear or go out of business which is exactly the sort of motivation that the Indian Airline industry needs.
Social service and bankruptcy are exactly what will occur if you leave the market in it’s current state of 6 players. Competition will force firms to come up with ways of lowering costs and therefore making their profit margins wider, therefore giving them profits.

Anurag Ghosh

So Mr Subhash if you so assume that only introduction of new airlines will force airlines to lower costs and make profits ; how is INDIGO making profits thriving on the same model with five other kids on the block? If Indigo can ; why can’t the other airlines ? The answer lies in identifying and solving the deep rooted problems and some changes in Government policies.Entry of a half dozen of new airlines is not going to solve the embedded problems of aviation sector and future is certainly going to witness that.

venkatkiyer

“Lower operating expenses!!! Was that a joke? As per as our understanding operating expenses depend on fuel (ATF) costs and the efficiency of the flights mostly. How can new airlines bring in improvement in that certain arena which the old ones cannot? Even to the best of our knowledge the new players cannot even change the taxation regime of the Government on which costs greatly depend”

We can all agree that the term ‘Economies of scale” isn’t the product of a joke Mr Verma. Operating expenses also revolve a lot around services at the Airport. Maintenance costs, fees paid to airports, fees paid to the government, the cost of food served to passengers, the cost of running computer systems to track bookings, fees and percentages paid to travel agents and Web sites, pilot training, and other incidental costs all add to operating expenses.When we use the term ‘Economies of scale’ to the industry as a whole, we talk about lower cost of services because of increased efficiency and infrastructure that caters to a larger set of firms, thus reducing the cost per firm.

Ashish Verma

Thanks for enlightening me Mr. Iyer. The expenses which you talked about apart from fuel and the impact of it if they are lowered (if possible) are given below:
a)Maintenance cost: cannot be lowered.
b) fees paid to the airport: reduction out of question here.
c) fees paid to the govt.: certainly not.
d) cost of food served to passengers: can give passengers low quality food on your own risk.
e) cost of running computers: again, cannot be reduced.
f) pilot training: i thought it was given by institutes and not the airlines (except some exceptional airlines which have integrated courses, where again major role is played by the training institutes).

and for the ‘Economies of scale’ or lowering the cost of services, don’t you think that the existing airlines which are incurring loss since 6-7 years haven’t tried it?