Sunday Interview: ‘No justification to bail out private airlines’

Financially-ailing SpiceJet shook the country by telling the government it is on the verge of closure. Jitender Bhargava, aviation expert and former executive director of Air India, tells Sridhar Kumaraswami what went wrong and the lessons the SpiceJet saga holds for the future.

Did the rapid unravelling of SpiceJet surprise you since the airline was confident of finding an investor, or was the die cast much earlier?

The current turmoil facing SpiceJet did not come as a surprise to aviation analysts. One could see it coming. Alarm bells had been rung some months ago but the airline management was dismissive of suggestions, describing them as misdirected speculation. This despite the fact that the airline had itself made known its precarious financial position through repeated offering of flash sales at ridiculously low fares in an attempt to improve its cash flow. Considering that SpiceJet failed to find an investor when it was operating 30-plus aircraft and commanding 20 per cent market share, and current promoters appear reluctant to infuse more money, one will have to wait and see. Let us hope it finds an investor soon.

Former promoter of SpiceJet Ajay Singh is expected to bail out the airline. Your comments.

Mr Singh willing to put in money for acquiring an equity stake will give SpiceJet a new lease of life. The long-term solution, of course, lies both in SpiceJet being managed more professionally and the government taking requisite steps on a priority basis to reduce operational costs through policies which are business friendly. One can’t have a perennial situation wherein everyone associated with the aviation industry — airports, governments, both Central and state, oil companies, travel and hospitality industry, etc. — make money but the airlines around which the industry revolves end up losing money even if run efficiently at decent load factors.

Have we failed to learn lessons from Kingfisher’s demise? Were there any parallels between the two cases?

There are plenty of parallels between Kingfisher and SpiceJet. Initial reduction in fleet size, large-scale curtailment/cancellation of flights, inability to pay aircraft-leasing and oil companies, airport operators, delay in depositing taxes, and finally employees. Then presenting an overoptimistic picture of finding an investor. I sincerely hope the parallel ends here and SpiceJet does not meet the fate of Kingfisher.

Regarding lessons being learnt from the Kingfisher experience, the answer is an emphatic no. Neither did the SpiceJet management get any wiser nor did the ministry of civil aviation. The agencies are waking up far too late. There is also an urgent need to monitor the financial health of our airlines by creating a mechanism wherein the first time an airline defaults in making payment to any agency, monitoring can begin and timely intervention can take place.
Managements, like in the case of both Kingfisher and SpiceJet, have displayed a tendency to be overoptimistic.

What ails the Indian aviation market, particularly at a time when fuel prices are at an all-time low?

We all know that India has not had a comprehensive policy to guide the aviation sector. Most decisions in recent years have been taken on ad hoc basis to help a particular airline or a country, as part of crony capitalism. Since no thought has gone into structuring the sector to make it robust, it suffers from multifarious infirmities. In India, we have had a paradoxical situation of high operational costs in a highly price sensitive market. Too much has been made of fuel costs though, admittedly, it is a key cost element. In the process other systemic weaknesses have been overlooked for corrective action.

Has the time come for the government to give some sort of a financial package to ailing private airlines, especially since Air India merrily sails on despite being loss-making only because it is a national carrier and so receives government bailouts?

There is no justification for the government to extend any bailout package to private airlines. These airlines are run by promoters as enterprises with no interference from government. Any comparison with Air India is flawed owing to the fact that for Air India the government is the promoter just as Marans are promoters for SpiceJet or Rahul Bhatia is for Indigo and Naresh Goyal for Jet Airways. Additionally, in the case of Air India, the government takes all major decisions on behalf of the airline, including who to appoint as chairman or the board. Air India is also thrust with decisions that may not necessarily be in airline’s interest. It is also mandatorily expected to follow government policies in recruitment, promotions, wages, which do not necessarily make the company either efficient or productive. Air India can’t be regarded as an organisation driven entirely by commercial considerations like the private airlines.

SpiceJet has told the government that closure would seriously affect brand India’s image and affect the livelihood of 10,000 families. Do you agree that the government looks nervous?

It is true that the closure of another airline so soon after Kingfisher will harm brand India globally, but that can’t be the reason for government to extend a bailout. The onus of managing the situation rests with the promoter and management of SpiceJet. The occasion should be used by the government to formulate new industry-specific policies (not airline-specific) so that an environment can be created which is conducive for profitable operations. As regarding the livelihood of 10,000 families, the management should logically put this issue before the promoters of SpiceJet and not the government.

Are you a believer in the survival of the fittest theory in aviation or do you feel that a carrier is a national asset even if it’s privately-owned and so needs to be saved no matter what the cost?

I am a staunch supporter of the survival of the fittest policy. However, I must hasten to add that government also needs to devise policies for making the operational environment healthy, efficient and competitive. Instead of treating all airlines as national assets I would regard them as commercial entities.
Financial assistance can be justified only if the cost structure has undergone a major change since an entrepreneur decided to float an airline fully knowing the business environment. Aviation turbine fuel and airport costs have traditionally been high. The operating environment has, however, improved over the years through changes in various policies.

Do you feel the government’s policy of allowing in more airlines while many of the existing ones bleed is a sound one?

It is not desirable to have a situation of excess capacity created through establishment of unlimited number of new airlines. The decision of the government to allow six more airlines besides AirAsia India and Vistara will only accentuate the problem as all airlines want to operate on almost similar routes.
When capacity far exceeds demand or a new airline enters the market, it leads to the new or financially better placed airline to offer “attractive” (read low) fares to garner market share. The ensuing fare war then leads to existing airlines recording still higher losses as they are forced to offer below-cost-of-producing-a-seat fares just to protect market share. Such a tendency on the part of airlines has been suicidal in the recent past.

Is there something inherently wrong in the low-cost carrier (LCC) model that has captured much of the market? Do you feel offering cheap fares beyond a point is what has done Indian aviation in?

There is nothing wrong per se in the low-cost model except that describing them as “low fare” instead of “low cost” will be more appropriate. Some of the low-cost airlines have committed hara kiri by offering ridiculously low fares, compelling even the legacy carriers, like Air India, with higher cost structures to keep their fares only nominally above those of low-cost airlines. The low-cost airlines are, in fact, guilty of recklessly benchmarking their fares too low in their misplaced attempt to stimulate the market, register high-load factors or increase market share at the expense of profitable operations. The consequences of such a misadventure are there for everyone to see.