Crisis in Jet explodes myths over aviation

The simplistic inference to be drawn from the financial decay of Jet Airways is that a private sector airline can run into debt due to mismanagement in the same way that Air India/Indian Airlines can in the public sector. This is not then a justification of the bad ways of the AI/IA. The malfunctioning of the national airline is partly due to bureaucratic ineptitude and political profligacy, but it is also due to inherent economic factors as well. And this holds good in the case of private airlines as well. That is, a private airline can land in trouble because of bad management as well as the inevitable market risks.

Most market pundits for the past 30 years have been arguing like evangelic novices that the only way to solve the economic woes of Air India/Indian Airlines is to privatise it. It is an intellectually dishonest argument because worldwide experience has shown that private airlines go down as well — and that is because it’s the nature of the market. The only legitimate argument for the privatisation of AI/IA is the ideological one — that the State has no business to run an airline — and not an economic one. So there is a real need to lay to rest for all time that the privatisation of AI/IA is the surefire economic cure for the national carrier’s woes.

And when faced with the failures of private airlines like Kingfisher and Jet Airways, analysts should not fall back on the infantile argument of crony capitalism as an explanation. Again, there is little doubt that there is crony capitalism, that most business tycoons are close to governments and political leaders, and that they take unfair advantage through public sector banks because of political connections. But that cannot be the sole explanation because there are some other issues as well. Kingfisher and Jet Airways, apart from taking advantage of their political connections, have also shown symptoms of irrational exuberance, and paid a price for it. And their fate shows that crony capitalism cannot protect them for too long.

It should also be remembered that through the so-called reforms, friendly governments have helped the tycoons in running their business empires. Former civil aviation minister Praful Patel had indirectly helped Jet Airways by offering it secure global routes which were earlier the monopoly of Air India. He tried to argue that he was creating competition in the sector, and that it was good for the public sector airline as well. At the same time, Mr Patel went in for a large purchase of aircraft for AI/IA, to expand the fleet of the national airline, which pushed it into the red though it was not the only reason. Crony capitalism cannot flourish without hinder. It reaches the end of the tether, as it were, and pushes the financial system to the brink. In India, the crony capitalists pushed the public sector banks to the brink of collapse. The elimination of crony capitalism does not, however, ensure the end of market blues.

Unless we go beyond the private sector/public sector dichotomy and accept the fact that a market economy is uncharted territory, and that it is not always a smooth ride, the crises that erupt from time to time, and Jet Airways is one such and it is neither the first nor the last, will generate false debates about the nature of the market economy. The answer to the risks of the market economy is not nationalisation or any kind of socialism. And the answer is also not to be found in unbridled capitalism.

The answer lies in risk analysis, which has become the dominant method for understanding the vagaries of the market. This needs to be done in the case of Indian civil aviation as well. Ironically, the shutting down of Jet Airways comes a month after the Indian Brand Equity Foundation (IBEF) in its newsletter had projected that the Indian civil aviation sector was set to become the third largest in the world by 2024 and attract Rs 1 lakh crore worth of investments during the same period. The figures of the passenger traffic between April 2018 and February 2019 are quite impressive, with the domestic passenger figure of 252.92 million. The projections might still turn out to be true, and the end of Jet Airways could just be a local disturbance. The growth of this sector and of the economy in general could be a rising graph because India as an emerging market economy holds out huge potential in many sectors. But this growth could come at a huge price as well, with turbulence of the Jet Airways kind.

The other issue that needs to be scrutinised well is the assumption that the government should expand and strengthen the air transport infrastructure because it is a crucial pillar of an expanding economy. The motto of Prime Minister Narendra Modi’s dream that a man wearing a “hawai chappal” should be able to fly as well may be good politics, but it need not necessarily make economic sense. The expansion of air travel has certain natural limits in terms of economic efficiency. The performance of the private sector airlines is dependent on the size of the air travel segment in the country. It is true that the limits have not been reached, and there is still huge room for expansion. But in trying to tap the market and overtake the competition, airlines will indulge in unfair trade practices like unreasonably low, as well as surge, prices of tickets. It will be necessary for some regulatory body like the Competition Commission to settle the issue of ticket prices, which will also protect the consumer and it would indirectly ensure the economic health of the private airline.

The crash-landing of private airlines like Jet Airways and Kingfisher is the norm of the market across the world. There is, however, a need to safeguard the public interest by ensuring that there are enough players all around. What has to be avoided at all costs is the crash of the civil aviation sector because of the crash of any airline.