Dhiraj Nayyar explains the airline industry’s woes

* What’s the trouble?

The airline industry is expected to accumulate losses of around Rs 8000 crore this year. The two leading private carriers, Jet and Kingfisher, are losing Rs. 8 crore a day. To compound problems, the airline industry is a high-debt industry. The cost of a small passenger Boeing 737 or A-320 is close to Rs 250 crore. And employee unions tend to be very strong, given the specialised nature of work of some employees, like engineers and pilots. Negotiating lay-offs and pay cuts isn’t, therefore, the easiest of tasks.

* Why are they making losses?

The airline industry is going through a bust in the midst of a general economic downturn. The worldwide industry is, in any case, prone to a sharp boom-and-bust cycle. The latest figures from the Indian market suggest that all the airlines are operating at just about 50 per cent of capacity. The problem for airlines is compounded in India by the extremely high price of aviation turbine fuel, one of the highest in the world. The government levies high taxes on jet fuel to cross-subsidise consumers of petrol and diesel. Airlines are not allowed to import jet fuel from abroad, which would be a cost-effective solution in the current circumstances.

* Why was there controversy over Jet sacking its employees?

In a free market economy, companies have to reduce costs when faced with a downturn, including on their wage bill. So pay cuts and lay-offs are perfectly reasonable in normal circumstances. The problem in the case of Jet Airways’ action was the shoddy and hasty manner in which it was done. No due procedure (notice period, pink slip, salary compensation) was followed in the dismissal of 1900 employees.The arbitrary and quick decision followed the announcement of an alliance between Jet and Kingfisher, the two market leaders. There was more than a hint of collusive and anti-competitive intent in the merger, the first impact of which was borne by the fired employees. A rise in passenger fares might be the next step, as the only serious competition a Jet-Kingfisher alliance faces is from the state-owned airline, Indian. Unfortunately, the industry has no independent regulator to look into competition, and other consumer issues. The Competition Commission of India is dysfunctional for the moment.

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