India must eject out of airline seat quotas

Written by Amber Dubey | Updated: Jul 2 2014, 07:22am hrs
How did the quota raj start

The bilateral seat quotas have their origin in the Chicago Convention of 1944, held towards the end of World War II. Many feel that it was done to prevent the US, the new superpower, from riding roughshod over the European states that were rebuilding their shattered economies.

Today, seven decades later, seat quotas have completely lost their relevance. Most leading countries, beset with sluggish economies and rising unemployment, are wooing global airlines to enhance services to their airports.

Falling margins have forced many airlines to shut down or merge with a larger player. Flag carriers of countries like Austria, the Netherlands, Switzerland, etc, are being controlled by other airlines. Etihad has bought stakes in Air Berlin, Air Seychelles, Aer Lingus, Virgin Australia, Air Serbia, Jet Airways and Alitalia (in process). The barriers are crumbling, and rightly so.

What is the open skies policy

Airlines are no more a holy cow. Foreign ownership in airlines is now welcomed the same way as in the rest of the aviation value chainairports, aerospace manufacturing, air-cargo operations, helicopter services, training and MRO. Mature nations are avoiding pumping of taxpayers money in loss-making flag carriers in the name of national pride.

The US has been advocating an open skies policy since the late 1980s and has succeeded in doing with several countries; for example, the Netherlands (1992), Singapore and New Zealand (2001) and the EU (2007). The open skies between the US and the EU highlight the irrelevance of protectionist policies enshrined in the Chicago Convention.

In 2009, ten countries in the ASEAN bloc agreed to have open skies. The Schengen Visa allows tourists to move seamlessly across 26 European countries. More barriers have crumbled.

Has the open sky policy hurt India

Nearly a decade ago, in 2005, India signed an open skies agreement with the US, resulting in unlimited seat quota between the two countries. Contrary to fears, it did not lead to a decimation of Indian carriers on the Indo-US routes. Air India and Jet Airways run regular flights to the US and have code shares with other US carriers.

India also has a universal open skies in air cargo. That too has not hurt India.

Have bilateral quotas helped India

Seven decades of protectionism has not helped Indian aviation. We lack a strong, globally-reputed national carrier. Our airports, despite a large middle class population, handle traffic which is a tiny fraction of what leading global airports handle. Foreign tourist arrivals in India are an abysmal 7 million per year, despite an unlimited bounty of natural, religious and cultural attractions here. In stark contrast, the small island of Singapore gets 14 million foreign tourists per annum, Malaysia 25 million and China 58 million.

The only way out is rapid globalisation and disruptive strategies. The case by case approach may not work. MoCA should consider implementing an open skies policy for an experimental five-year period. Lets see if the heavens fall. We can always roll back the policyit is Indias sovereign right. The open skies agreement with the US proves that most of our fears are unfounded.

Whos afraid of competition

There are fears that certain global airlines that enjoy sovereign support, subsidised fuel, low airport charges and non-unionised staff, etc, may offer dirt-cheap fares and kill Indian carriers. There are adequate regulatory provisions in India to prevent predatory dumping of cheap tickets. Shall we wait till Indian carriers build a large fleet of wide-body aircraft and exhaust the Indian quota, before we enhance seat quotas of foreign carriers Do we really have the luxury of time

In sector after sector that we opened up, we have seen quality standards improve and prices fall. Indian companies in sectors like telecom, banking, hospitality, automobiles, etc, have become world class. We applaud when Mittals, Tatas, Birlas and Mahindras buy out Arcelor, JLR, Novelis and Ssangyong, but cringe at the possibility of foreign carriers capturing the Indian market.

How will India gain

The open skies policy will lead to an increase in flights from leading global airlines to and from India. Traffic will rise, quality will improve and prices will fall. Since global airlines will have empty seats to fill especially during lean seasons, they themselves will market India, a la Singapore Airlines promoting Australia.

The global airlines may initially eat into the market share of Indian carriers, but will also expand the size of the cake. Many foreign tourists skip India in favour of destinations in the ASEAN due to Indias poor and costly air connectivity with the rest of the world. Artificially blocking the growth of global airlines on Indian routes ultimately hurts India.

Leading Indian carriers will compete, collaborate or merge with global carriers. They will enjoy the competitive advantage of having non-stop flights to their global destinations. This is something that global carriers cannot provide, since, under 6th Freedom Rules, they are required to have a stopover in their country of origin.

Allowing open skies allows the Indian government to negotiate greater access for Indian products and services; for example in the EU, the Gulf and the ASEAN. All parties gain.

Indian aviation has adopted a vision of being Number 1 by 2030. We are ranked ninth right now and it doesnt feel good. Getting to Number 1 would require bold, disruptive reforms that make India a great destination to fly to. Well get there.

(Assisted by Kunal Sinha, senior consultant, Aerospace and Defence at KPMG in India)

The author is partner and India head of Aerospace and Defence at global consultancy KPMG.

Views are personal