x Abu Dhabi, UAE Friday 21 July 2017

Air India at mercy of government largesse

Air India's Maharajah - the moustached, turbaned emperor in red - has been one of the most enduring mascots of any national carrier.

Air India's reputation for service and hospitality has become tarnished as it struggles to remain financially viable.
Air India's reputation for service and hospitality has become tarnished as it struggles to remain financially viable.

Air India's Maharajah - the moustached, turbaned emperor in red - has been one of the most enduring mascots of any national carrier. Today his red coat is in tatters and faded, the red colour smearing the balance sheet liberally. Air India had the fine reputation of hospitality and was an early pioneer in introducing an all-jet fleet. Other airlines liked to imitate aspects of its service. Now, the maharajah is on the ropes.

The mood at the landmark Air India building in Mumbai's Nariman Point is dismal. Its flights are no longer full. Its fleet is sometimes grounded. It has had to drop routes that could turn lucrative because it did not anticipate its leases properly. It is forced to fly certain routes even when the demand is low because of the whims of powerful politicians. It competes with its own subsidiaries on select routes, undercutting fares and hurting its own bottom line.

Staff productivity is low, but as an employer of thousands, the government, which owns the carrier, is going to find it hard to resist India's vocal trade unions and the political Left, which will insist that jobs must be preserved at all costs. Given the mess, passengers are voting with their feet, flying with foreign airlines as well as other private Indian carriers such as Jet and Kingfisher although they, too, are affected by the global financial crisis. As a result, Air India's market share has dropped to barely a sixth of flights within India and less than a quarter of flights connecting India with the world.

Should the government offer Air India a lifeline? The airline has a reasonable case: its managers can argue that the company is in trouble because the state has interfered and starved the carrier of resources. They can also argue that the government has traded away the airline's rights to foreign and domestic competitors, a process that accelerated in the past two years and saw private Indian airlines flying international routes while international carriers gained better access to the domestic market.

The airline does not control the cost of aviation fuel, although it buys a lot of fuel within India, where its suppliers are other state-owned firms, to which it owes money. And it does not have any leverage over the global economy and a downturn that has led to such a steep drop in business travel worldwide. Mass travel between India and the Gulf - its cash cow - has tapered off, partly because of stalled construction projects in some parts of the Middle East.

But the airline cannot blame the government for all its woes. There is a broader question: does India need a state-owned carrier? Air India began as a private airline in 1932 and the government took over operations in 1953. The airline was nationalised because for newly independent nations, a national carrier seemed as important a symbol as the flag, the national anthem and the currency. The prevailing political and economic consensus in developing nations, too, held that key sectors of the economy should be controlled by the state.

India wholeheartedly embraced the socialist notion of state control and believed the private sector could play only a limited role in the economy. It was assumed there were businesses in which the private sector could not invest because of scarce capital. Then, the logic followed, there were businesses in which the private sector would not invest because of low profit potential. And finally, it was believed there were businesses in which the private sector should not invest, due to ideological reasons including national priorities.

In the first category fell large projects such as ports, shipbuilding, steel and mining. The second category comprised activities for public good such as water supply, food distribution for the poor, irrigation and power. The third included a vast range of industries, which India's left-leaning politicians and bureaucrats believed would be unsafe in the hands of the private sector, because the ruling class had deep distaste of the profit motive.

That is changing: India liberalised its economy in 1991 and its vibrant private sector has shown that many of those perceptions were false. Capital will flow to the entrepreneur, public or private, if returns are assured and the business has potential. What keeps the state from privatising many businesses are other considerations such as maintaining patronage, preventing job losses, refusing to cede control and continuing to distrust markets.

If India continues to prop up Air India, it is largely for political reasons. This does not mean the maharajah has to be mothballed and the airline closed down. But it does mean serious questions need to be asked; whether the Indian taxpayer should underwrite an airline when there are other, more pressing priorities. Rural infrastructure is an obvious example. There is a credit crisis in rural India; India's farmers could do with more efficient power supply and better irrigation. Its primary schools need chalk, blackboards, textbooks and teachers, if not personal computers. Its primary healthcare centres need doctors who will visit clinics regularly, and those clinics need a reliable stockpile of medicines. Its villages need drinking water.

All of that costs money. And that is what the Government should focus on, and get those basics right, rather than run an airline that requires exceptionally nimble management, snappy decisions and ruthless cost cutting. Government bureaucrats are fundamentally incapable of playing that role. Air India need not collapse. With autonomy, its managers are capable of creating a niche for the airline in a competitive market. That will not happen overnight.

But it is high time the airline was run like a business responsible to its shareholders, with consumers deciding if it should prosper or perish. Even without Air India, people will still travel to India; and even without the Maharajah, Indians will go abroad. A radical Indian government in the 1960s pensioned off its real princes, regarding them as an anachronism in a modern democratic republic.

The government today needs to be similarly hard-headed and discard another anachronism; its obsession with state ownership of businesses that the private sector is eminently capable of running. Ultimately, what is more important for the state - 31,500 employees or 300 million people whose lives India's undoubtedly successful economic reforms have not yet touched? business@thenational.ae