Bailouts for PSUs result in rate cuts, industry sickness

Written by parul | Parul Chhaparia | Rishi Raj | New Delhi | Updated: Feb 25 2012, 10:35am hrs
Bailout packages have rarely helped resuscitate ailing public sector undertakings they have only sunk further as a result, in some cases taking other players in the industry also along.

The latest R18,000-crore bailout package from the Centre for Air India is unlikely to be any different. The airline would, in all probability, continue to do what it has been doing all along offer below-cost tariffs on busy sectors that private sector competitors would be forced to follow, causing their finances also to collapse.

What Air India has been doing and might continue to do has an example in the telecom sector. State-owned Bharat Sanchar Nigam in the mobile telephony business provides below-cost services on the back of government doles and drives industry tariffs down, leaving the entire sector ailing. Incorporated in 2000, BSNL began offering mobile services in October 2002, much later than its private sector peers, but by mid-2003 emerged as the second-largest GSM mobile operator, overtaking Hutchison Essar (as it was then known). Such was the enthusiasm then that the development led many to predict that shortly it would wrest the No. 1 position in the space by outpacing the Sunil Mittal-led Bharti Airtel. Today, while BSNL is sick, even private operators like Bharti, Idea Cellular and Reliance Communications are witnessing substantial declines in their profitability with nearly stagnant revenues.

AIs story seems a rerun. In May 2011, it offered fares 10-15% lower than the ones even by low-cost carriers. This had irked Jet which objected to such predatory pricing.

"Air India is discounting fares and that's absolutely a problem," M Shivkumar, the airline's senior vice-president, finance, had then said.

If one were to travel on the Delhi-Mumbai sector, one of the busiest in terms of traffic, and book tickets for, say, March 1, Air India offers the cheapest ticket even cheaper than the ones provided by low-cost carriers like IndiGo and SpiceJet at Rs 6,515. The fares offered by IndiGo and SpiceJet would be Rs 6,755 each, while GoAir charges Rs 6,754. A Jet Airways ticket would come for Rs 7,240 and Kingfisher for Rs 7,305. The last two are full-service carriers.

"I think Air India should check their dynamic prices, under which prices move depending on seat availability and season. In the case of AI, the prices are mostly lower than other carriers, and it certainly affects the revenues of private airlines, which are forced to be competitive, said Rajji Rai, president of Travel Agents Association of India.

"They (AI) are selling at lower prices because they have additional capacity to fill, said Ankur Bhatia, executive director of travel company Bird Group.

The situation today is that in the first nine months of the current fiscal, all major airlines have posted heavy losses. The outlook offers no hope with the aviation advisory firm Centre for Asia Pacific Aviation pegging the domestic airline industry's losses in the current fiscal at Rs 15,000-20,000 crore.

Air India's situation is among the worst of the lot with total outstanding loans and dues worth Rs 68,120 crore. The carrier incurs a daily cash loss of Rs 21 crore and its seat factor ranges around 75-78%, which is much lower compared with the break-even flight occupancy of over 90% at prevailing industry yield. The company's own estimates state that it is unlikely to make profits in the next four to five years.

In the case of BSNL, for the first three years of its operations the government reimbursed it the licence fee it was liable to pay. Then it created the access deficit charge, wherein mobile operators paid a certain charge to the state-owned company to compensate its below-cost services in rural areas. When this was disbanded, the government offered it Rs 2,000 crore from the Universal Service Obligation Fund, which ended in July 2011.

Where is BSNL today For the 2010-11 fiscal, its net loss stands at Rs 6,384 crore. It is losing around Rs 25 crore each day and Rs 750 crore each month and it is highly probable that it will be rushing to the government soon it has money to pay salaries only till June.