India - Airlines in a mess

In the to-do over the summary sacking and taking back of 1,900 employees of Jet Airways, little attention has been paid to the many other issues raised by the coming together of Jet and its principal rival, Kingfisher Airlines, in an operational alliance that many see as the precursor to an inevitable merger. Observers of the Indian business scene will recall that when Coca-Cola India bought Parle’s soft drinks business some 15 years ago, management guru Michael Porter had declared on an India visit that such an acquisition clearly raised issues with regard to competition policy — which India did not have then. It does now, and a Competition Commission has been set up even though it is not fully active as yet. Yet, one has heard nothing from either the commission or the government about the wisdom and legality of the coming together of two airlines that, between them, command 60 per cent of the market. Indeed, their dominance in specific sectors (i.e. routes) will be much greater. This has obvious implications for the other airlines, some of which have already expressed the fear that they might be crowded out of the market in a variety of ways. The loser then will be the passenger, who could end up paying much more for air tickets than is the case today — and air fares stopped being cheap some months ago.


This is not to argue that the two airlines are not in trouble, or that they do not need to cut costs. Indeed, reports suggest that Jet and Kingfisher between them could lose close to a billion dollars this year. That is a colossal number for the size of these businesses — though the number might drop, now that oil prices have fallen. The corrective action has to come from the airlines, both of which have been gunning for market share. Both therefore have too many planes in the air, and this has led to more planes flying with more empty seats than is viable. The mistakes were made in 2006 and 2007, when Deccan Aviation and Sahara Airlines ran into trouble. Their closure would have led to the taking out of capacity. Instead, Jet bought Sahara and Kingfisher bought Deccan, and kept the planes in the air — unwisely, as is now clear.

The airlines themselves blame their troubles on the high cost of aviation fuel, which costs much more in India than in most markets. They have a point, and the share of fuel in total costs is irrationally high at about 50 per cent. But even as they ask the government for relief on this front, the two airlines need to show that they have taken action that is in their domain. The simple point is that if the industry has expanded way beyond what the traffic can support, the extra capacity has to be taken out. Without that, no rationalisation of aviation fuel prices will help achieve viability. In defence of the airline managements it should be said that they have indeed been cancelling flights, abolishing irrationally low fares, and cancelling orders for yet more aircraft, but much more needs to be done. Taking out capacity also means reducing the size of the workforce, and that has become a contentious issue after Jet mismanaged its retrenchment move last week. Still, it is inconceivable that viability can be achieved with the present staffing levels.