The dismay at the steep increase in airline fares has not been as vocal as the outrage over the 2G telecom licences mess, but is disturbing nevertheless. The truth is that some of the increases may be justified: demand for air travel has increased, passengers are willing to pay more for travel, capacity constraints do not allow a rapid seat kilometre increases, so fares increase. The steep fare increases, we are told, are only for the ?marginal? seats booked at the ?last minute?. The cost of aviation fuel has gone up, as crude prices have increased globally. Fuel costs account for about 35% of operating costs in India, much higher than in other peer countries, largely due to high taxes on ATF. Airlines had been bleeding during the global downturn and this was an opportunity to improve their balance sheets.
Nothing wrong and unfair, as such. Automatic stabilisers would correct fare anomalies. Steep fare increases will lead to a drop in demand for travel, load factors would drop, seats would go a-begging and a drop in yields would eventually force airlines to reduce fares. That?s how competitive markets work.
Problem is that the airline business is not particularly competitive. In fact, the world over, it is one of the most wretchedly regulated, negotiated and controlled businesses, particularly when it comes to allowing foreign airlines to operate domestic flights. There are, to my knowledge, 9 ?freedoms? agreed on by international conventions, dictating airline permissions to operate across and within countries. Governments negotiate ?bilaterals? with an intensity that would put other trade negotiations to shame.
The parallels to the mechanics of spectrum allocation are quite striking. Airline operations are dependent upon airport infrastructure, with scarce landing and takeoff slots and parking bays at congested airports determining network operations and flight scheduling. As assigned spectrum bands determine tower location, cell configuration, etc, airport landing slots determine airline operations. While these slots may not be a classic public resource (like roads or spectrum), there are many aspects that make for similar characteristics.
Globally, route planning and pricing have been susceptible to anti-competitive, often collusive behaviour. Mandating transparency in data disclosure is a terrific antidote to non-transparent, case-by-case data reporting, which is what the DGCA?s actions have initiated. The government?s intervention has resulted in an apparent reduction in fares. But this might be entirely transient. There is little to suggest that Indian carriers are intent on squeezing maximum operating efficiencies. But is there a market solution to encouraging competition, bypassing detailed administrative oversight? Yes; by increasing competition. One way is to give licences to new domestic entities that are willing to establish new airlines. The trouble is that their core competencies are in non-aviation businesses, necessitating foreign JVs.
An alternative is allowing established foreign operators access to domestic passenger routes. In the byzantine jargon of aviation, this is called ?cabotage? and is part of the ?ninth freedom?. A foreign airline is given the right to carry passengers between two Indian cities. Say, a middle-eastern airline is allowed to bring passengers from Dubai to Lucknow via Kochi, and then after Kochi passengers deplane, fill the empty seats with Kochi passengers onwards to Lucknow. Few countries allow cabotage, but there is no reason why we can?t be pioneers. Australia and Chile allow passenger airlines owned by foreign entities to operate domestic flights.
This access to Indian skies should not be unilateral. The government should start bilateral negotiations with other countries to explore options to permit Indian carriers reciprocal rights to ferry domestic passengers in those countries. In October 2007, for instance, the UK granted Singapore carriers the right to fly domestic UK routes as part of an open skies agreement. Reciprocally, British carriers were allowed to fly to any city from Singapore. Indian carriers have expressed interest in operating overseas. A level playing field should be the starting point of talks, so as not to confer unfair operating advantages on foreign carriers. Fuel costs are a major source of asymmetry. For instance, refuelling at Indian airports might be mandated for foreign airlines. Note that Indian airlines operating abroad can also refuel cheaply at those stations.
This brings us to pricing scarce airport landing/takeoff slots and parking bays at congested Indian airports. Like any other contestable market, these can be auctioned. Will auctioning not increase uncertainty and raise the costs of operations and hence fares? Possibly, but auctions typically have tended to force increased efficiencies.
The author is senior vice-president, business & economic research, Axis Bank. These are his personal views
