MANAGERIAL ECONOMICS
LIBERALISATION OF THE AIRLINE SECTOR
INTRODUCTION
Liberalisation - Opening up of a country's markets to foreign/ private players.
The liberalisation process in the airline sector has been going on since 1992, but it has seen a lot of turbulence.
The main effects of liberalisation in this sector are: more players, less fares and better service. Before 1992 there was just one airline - Indian Airlines. When the government liberalised the sector in 1992 a lot of airlines came in (Damania, East-West, Jet), but with a market shake-up in the mid 90's only the fittest have survived. Today there are 3 major national players (IA, Sahara, Jet) and several regional players (NEPC, Span, Gujrat). As a result of liberalisation, the services of all airlines have gone up and along with that the fares have dropped noticeably.
GOVERNMENT POLICY
The policy of the government in the 50's was to connect all of India via air. Hence today we find that almost all small towns of India have airports. The policy failed because not many people could afford to fly and almost no one flew to small towns. Today when small towns are finally getting flights it is found that the equipment at the airports is outdated (eg - The Patna airport was built in the 60's but use of the airport and all it's facilities began only in the 80's. That is, for twenty years the equipment in the airport was just lying around).
After 1992, however, the government has adopted an "Open skies" policy. In this policy, players are allowed to enter and leave the market as they seem fit.
IS THE GOVERNMENT SERIOUS ?
Often it has been found that the government's talk on liberalisation has to been taken with a pinch of salt. In the airlines sector it has been seen that although the government seems to have done a lot about liberalisation there are still some areas that haven't changed at all.
1. Narrow air corridors - An air corridor is nothing but the width of the passage an airliner can fly in. In India most of the air corridors are still very narrow as a majority of the airspace is still with the airforce. For instance, the approach to the Delhi airport is just 3 kms. wide. This narrow corridor was a primary cause of the April 26 1993 Charki Dadri crash in Haryana, where all 351 people on board two international airlines - Saudi Arabian Airlines and Kazakhstan Airlines were killed in a mid-air collision. It was one of the worst crashes in aviation history. So although the government has opened the skies they haven't yet opened the highways of the sky.
2. Tata-SIL - Some years ago the Tatas along with Singapore Airlines wanted to start a domestic airline service in the country. The government, under pressure from Indian Airlines, didn't give them the permission to do so. IA feared the competition that Tata-SIL could provide. They also said that before allowing the Tata-SIL airline to take off, the government should allow them to function as a complete private airline. This demand was not completely unjustified as even today IA is made to give 50% discount to IAS and defence officers. Also, they are made to fly to less popular destinations (North-East, Andaman & Nicobar Islands) which results in a loss of revenue for them.
On the other hand, today the government is ready to privatise IA and AI. They are even willing to let any foreign airline hold a 40% stake in Air India. Such a step shows a deep commitment to liberalisation and has been well received by the global airlines. Many airlines have already come forward and placed their bids for the stake in AI (Delta Airlines, Singapore Airlines, Air France).
To conclude one can say that even though the government has been giving confusing signals in the past, it seems that now they are ready to go ahead with the liberalisation process.
ATEC COMMITTEE AND IT'S FINDINGS
Pre 1956, private companies were allowed to open scheduled/ non-scheduled airlines. A total of 9 institutions came up. In this period a 'Dakota' was sold for Rs. 20,000. However, these airlines soon started having financial problems. The operators requested the government for loans. The government wanted to know as to why the private airlines weren't doing too well and so it appointed the ATEC (Air Transport Enquiry Committee) headed by Dr. Rajyadhaksha to do so. After completing it's investigation the committee came up with several reasons for the economic poor show of the private airlines, four noteworthy reasons were:
a) Non-standardisation of inventories - Different qualities and types of equipment was used due to multiple type of aircraft used. This hiked the maintenance cost of all the airlines.
b) Multiplicity of rate - The rates of all institutions differed.
c) Loss of revenue due to NAMS - NAMS means Nightly Air Mail Service. Private operators were made to carry air mail on their flights at night time, which meant a loss of passengers and hence a loss of revenue.
d) High cost of fuel - The fuel used in aircraft is ATF (Aviation Turbine Fuel). It is nothing but a form of highly purified kerosene. However, the purification process accounts for 35% of the cost of the fuel which many operators could not afford.
These reasons along with several other reasons lead to the nationalisation of the airline sector through the 'Air Co-operation Act' which took effect on 26 June 1953. Under the act, eight out of nine private operators became 'Indian Airlines Corporation' and one was constituted as 'Air India Corporation'.
WHY DEREGULATION AND SCHEDULED AIRLINES?
According to the planning commission the air transport industry in India has a growth rate of over 10% and with the existing fleet strength the national airline could not meet the demand in the market. Hence, deregulation of the skies was the only option. Deregulation means to allow free entry in to the market. Private airlines were allowed to start as air taxi operators in 1992. The growing demand for rationalisation of policies made the government lay down conditions through which air taxi operators could become scheduled airlines (ie - they are allowed to print their schedules). The major emphasis in allowing scheduled airlines are:
a) Government permission to import aircraft.
b) Rationalisation of operative routes.
The players who come in to the market either exist with all their gimmickry or fade away due to economic pressures.
CONCLUSION
After independence India had private airlines operating in the airlines sector, however in 1953 the government nationalised this sector which lead to years of government monopoly and a basic downgradation of the airline services. In 1992, however private airlines were once again allowed to operate. To put it in one line, "History repeats itself".
LIBERALISATION OF THE AIRLINE SECTOR
INTRODUCTION
Liberalisation - Opening up of a country's markets to foreign/ private players.
The liberalisation process in the airline sector has been going on since 1992, but it has seen a lot of turbulence.
The main effects of liberalisation in this sector are: more players, less fares and better service. Before 1992 there was just one airline - Indian Airlines. When the government liberalised the sector in 1992 a lot of airlines came in (Damania, East-West, Jet), but with a market shake-up in the mid 90's only the fittest have survived. Today there are 3 major national players (IA, Sahara, Jet) and several regional players (NEPC, Span, Gujrat). As a result of liberalisation, the services of all airlines have gone up and along with that the fares have dropped noticeably.
GOVERNMENT POLICY
The policy of the government in the 50's was to connect all of India via air. Hence today we find that almost all small towns of India have airports. The policy failed because not many people could afford to fly and almost no one flew to small towns. Today when small towns are finally getting flights it is found that the equipment at the airports is outdated (eg - The Patna airport was built in the 60's but use of the airport and all it's facilities began only in the 80's. That is, for twenty years the equipment in the airport was just lying around).
After 1992, however, the government has adopted an "Open skies" policy. In this policy, players are allowed to enter and leave the market as they seem fit.
IS THE GOVERNMENT SERIOUS ?
Often it has been found that the government's talk on liberalisation has to been taken with a pinch of salt. In the airlines sector it has been seen that although the government seems to have done a lot about liberalisation there are still some areas that haven't changed at all.
1. Narrow air corridors - An air corridor is nothing but the width of the passage an airliner can fly in. In India most of the air corridors are still very narrow as a majority of the airspace is still with the airforce. For instance, the approach to the Delhi airport is just 3 kms. wide. This narrow corridor was a primary cause of the April 26 1993 Charki Dadri crash in Haryana, where all 351 people on board two international airlines - Saudi Arabian Airlines and Kazakhstan Airlines were killed in a mid-air collision. It was one of the worst crashes in aviation history. So although the government has opened the skies they haven't yet opened the highways of the sky.
2. Tata-SIL - Some years ago the Tatas along with Singapore Airlines wanted to start a domestic airline service in the country. The government, under pressure from Indian Airlines, didn't give them the permission to do so. IA feared the competition that Tata-SIL could provide. They also said that before allowing the Tata-SIL airline to take off, the government should allow them to function as a complete private airline. This demand was not completely unjustified as even today IA is made to give 50% discount to IAS and defence officers. Also, they are made to fly to less popular destinations (North-East, Andaman & Nicobar Islands) which results in a loss of revenue for them.
On the other hand, today the government is ready to privatise IA and AI. They are even willing to let any foreign airline hold a 40% stake in Air India. Such a step shows a deep commitment to liberalisation and has been well received by the global airlines. Many airlines have already come forward and placed their bids for the stake in AI (Delta Airlines, Singapore Airlines, Air France).
To conclude one can say that even though the government has been giving confusing signals in the past, it seems that now they are ready to go ahead with the liberalisation process.
ATEC COMMITTEE AND IT'S FINDINGS
Pre 1956, private companies were allowed to open scheduled/ non-scheduled airlines. A total of 9 institutions came up. In this period a 'Dakota' was sold for Rs. 20,000. However, these airlines soon started having financial problems. The operators requested the government for loans. The government wanted to know as to why the private airlines weren't doing too well and so it appointed the ATEC (Air Transport Enquiry Committee) headed by Dr. Rajyadhaksha to do so. After completing it's investigation the committee came up with several reasons for the economic poor show of the private airlines, four noteworthy reasons were:
a) Non-standardisation of inventories - Different qualities and types of equipment was used due to multiple type of aircraft used. This hiked the maintenance cost of all the airlines.
b) Multiplicity of rate - The rates of all institutions differed.
c) Loss of revenue due to NAMS - NAMS means Nightly Air Mail Service. Private operators were made to carry air mail on their flights at night time, which meant a loss of passengers and hence a loss of revenue.
d) High cost of fuel - The fuel used in aircraft is ATF (Aviation Turbine Fuel). It is nothing but a form of highly purified kerosene. However, the purification process accounts for 35% of the cost of the fuel which many operators could not afford.
These reasons along with several other reasons lead to the nationalisation of the airline sector through the 'Air Co-operation Act' which took effect on 26 June 1953. Under the act, eight out of nine private operators became 'Indian Airlines Corporation' and one was constituted as 'Air India Corporation'.
WHY DEREGULATION AND SCHEDULED AIRLINES?
According to the planning commission the air transport industry in India has a growth rate of over 10% and with the existing fleet strength the national airline could not meet the demand in the market. Hence, deregulation of the skies was the only option. Deregulation means to allow free entry in to the market. Private airlines were allowed to start as air taxi operators in 1992. The growing demand for rationalisation of policies made the government lay down conditions through which air taxi operators could become scheduled airlines (ie - they are allowed to print their schedules). The major emphasis in allowing scheduled airlines are:
a) Government permission to import aircraft.
b) Rationalisation of operative routes.
The players who come in to the market either exist with all their gimmickry or fade away due to economic pressures.
CONCLUSION
After independence India had private airlines operating in the airlines sector, however in 1953 the government nationalised this sector which lead to years of government monopoly and a basic downgradation of the airline services. In 1992, however private airlines were once again allowed to operate. To put it in one line, "History repeats itself".