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Story: Federation of Indian Airlines: The Strike That Was Not
Question: Do you think the Government should do or have done something to "bailout" or "assist" the private airlines in India? Give Your Reasons
The help sought by the private Airlines industry from the Government is mainly in two forms. One is in the form of a "Bailout" and other is in the form of "Assistance". We need to look at both these forms of actions independently.
The answer to the question that whether government should have done something to bailout the industry lies in the answers to few simple but important questions. The first question is "What we mean by "bailout" and Why it is required". In economic sense it is a situation in which a company, individual or government offers financial assistance to a failing business in order to avert the consequences that arise from a business downfall. Bailouts can take the form of loans, bonds, stocks or cash. It may or may not require reimbursement. In most of the cases the helping hand is provided by the government in industries or businesses that may be perceived no longer being viable, or are just sustaining huge losses. Typically, these companies employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business folded. The second and the most important question is "Where the bailout money comes from". The money that is been handed to the failing business is not the government money because there is no such thing as government money - it is only the taxpayer's money. So many a times the ethicality of bailing out a failing business by the tax payer's money is also raised. It is like someone is paying for somebody else's sins.
In the case of Indian airlines, the bailout is sought by the big players. While the small players have clearly denied demanding any bailout from the government, it is very important to analyze what are the factors that led to a situation where bailout is demanded by the big established players. The globalfinancial crisis of 2007-2009 is considered to be the worstfinancial crisissince theGreat Depressionof the 1930s. It contributed to the failure of key businesses, decline in consumer wealth and a significant decline in economic activity. Airline industry all over the world was badly affected and India was no exception. But a close observation of Indian airline industry will reveal the fact that economic slowdown was not the only factor of their poor performance. In these difficult times also ,the low-cost carriers did a fair business. Apart from economic reasons the poor performance of private airlines in India especially in the case of big players is contributed by the bad management practices and faulty business models. The big players like Jet Airways and Kingfisher instead of going for a cost-cutting mechanism, spend huge money in advertisement and sponsorship. Their top management enjoyed very high salaries and led an extravagant life. The business model followed by most of the companies also did not help their cause. As a part of economic reform and liberalization Indian Airlines sector was opened to private players. The Indian aviation industry was one of the fastest growing aviation industries in the world. The government's open sky policy had led to many overseas players entering the market and the industry had been growing both in terms of players and number of aircrafts. Experts predicted even higher growth for future. But all these growth prediction about the aviation industry was not discounted for the economic slowdown. Over-optimistic projections of growth in aviation industry in India led to over capacity in many airlines at the cost of serving multibillion dollar loans for buying or leasing out new aircrafts. Further the losses of full service carrier like Jet airways and Kingfisher could be attributed to their acquisition of low cost carriers Sahara Airline and Deccan Aviation and rechristening them as JetLite and Kingfisher Red respectively. So it is quite evident that all these bad practices had led to this situation for the big players. Hence a demand of bailout from the government seems quite unjustified .Instead they should have to relook at their business models as despite of economic slowdown and high fuel prices the low cost airline reported profit. A bailout by government may set a bad example for others and may encourage free riders in the economy.
The other action that the industry is seeking is in the form of" assistance ". Contrary to the situation where the aviation industry was divided whether to demand for a bailout or not, it seems that the industry stands united in asking for assistance from the government. Their area of concern were the rising price of aviation turbine fuel (ATF), ground handling charges and landing and parking assistance. These assistances were not strictly financial in nature. They asked for more liberalized rules and regulations for Indian aviation industry because it will help them become more globally competitive and they will be able to serve their customer better. A reduction in the cost of ATF has a significant impact on the airline balance sheet. The distortion in ATF price by the domestic oil companies and the taxation structure results in a huge burden on the airlines bottom lines, making airlines in India uncompetitive and unattractive for equity capital and debt financing. The other major area of concern for the private airlines is the new ground handling policy as it would escalate the cost of the carriers by 30% to 40%.
The assistance that the private airlines seek from government is more reforms in the regulatory framework of aviation industry in India to make it a viable business. So the government should take steps to help the industry by making a revisit to all the issues of concern. The government should follow the recommendation given by the experts to prevent further losses for the aviation industry. They should have a relook at the tax structure for the private airlines. Government might consider giving ATF the "declared goods" status. The ATF prices, the parking and airport usage charges must be brought down to international standards. The government should reconsider on the new ground handling policy without compromising development of airport infrastructure or security of passengers.
While a bailout is strict no for the private airlines, the government should do something to assist the private airlines for the betterment of not only the aviation industry but also for the overall economy.