Airlines will need service quality regulation

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: With Delhi and Mumbai airport in competent private hands. one can breathe a little easy. The underutilisation of assets, absurd designs, quixotic operational processes that impose huge passenger side discomforts and costs may hopefully go away.

Nothing illustrates the failure of the system as the design of Delhi airport. Domestic terminals are separated by ownership of airlines using them! As such bloomers are corrected, consumers would gain huge value, even before the runway layouts, and taxi paths crossing each other etc are corrected. And much before the investments take place.

Similarly created monopolies that ‘served’ food and drink and reading material would hopefully go away, as the private incentive to maximise revenue takes root. Unfortunately, these benefits would miss the other airports, as the government is keen to give a free reign to AAI. But maybe, there is hope? As customers experience the difference, AAI itself might change, the way Indian Airlines had to, with competition from Jet and Sahara.

There is much left wanting in the regulation of airlines that threatens to destroy consumer value. Values waiting to be tapped in riding scale and scope economies and in falling costs. To the economist, airline operations are natural monopolies but subject to contestability. This characteristic arises from both from the production and consumption sides. Given the contestability, the current wisdom is for regulation to allow any airline from other territories to operate temporarily to skim away any premium prices the entrenched regional monopolist would charge. This threat, it is claimed, would eliminate the need for price regulation. True, but it also makes airlines go bankrupt.

The super additivity of benefits on the consumer side makes it important to maximise the number of connections, minimise the waiting time and costs, cut the information clutter and the variety in the bargains, and allow for seamless use of multiple carriers over a journey. Market forces can’t guarantee these. If the American, European and East Asian markets have found this problematic, in the Indian market with smaller players with little experience or concern about service quality, the matter is far more serious.

The regulator would have to give serious thought to these issues. Instances like AirDeccan or Spicejet trying to charge for wheel chairs, or GoAir allowing less than 15 kgs and then ripping off the customer for excess luggage should be ruled out.