The recent series of setbacks to Air India have highlighted serious issues. The concern is not just of aviation safety but more important ones related to continued public ownership of companies in certain sectors. One such key issue is fulfilment of ?social obligations?, particularly since this argument is being increasingly used for justifying continued public ownership. The argument is that private airlines have little commercial interest in flying to remote areas like the Northeastern states, and to smaller towns, and the national carrier has to step into this void.
The established thinking is that access can be increased by allocating operations using administrative rules. For airlines, for instance, routes are classified as categories I, II and III, depending on whether they serve metros and large cities, or grades of smaller towns. Tier-2 comprises flights to ?12 profitable? cities, 20% of tier-1 flights must be to tier-2 and 50% to tier-3. Economics has actually been exploring sensible alternatives to increasing access. In aviation, these had been elaborated in detail in the Naresh Chandra Committee Report on Aviation, way back in 2004, which now needs to be dredged up for discussion.
The essential point is this. Flights to remote areas that are ill-served by any other means of transport should be treated as a social good and explicitly subsidised by the government. These explicit subsidies also have the desirable effect of inducing transparency about the real costs of operations to non-commercially viable areas, serving to limit the transfer of costs of overall inefficient operations on to operations to remote areas.
These alternative methods for increasing access are quite similar to the use of transfers, sometimes using explicit ring-fenced funds, in other areas of infrastructure services. For example, the Viability Gap Funding mechanism for many public private partnership projects, or of the Universal Service Fund for rural telephony. The downside is that multiple pieces of a large regulatory jigsaw will have to fall in place. The following provides a superficial glimpse at some of the features of these alternatives.
Subsidies to airline operations should be separated from those to airports; both will be required. Airports are natural monopolies; commercial viability considerations imply that multiple airports will not be feasible for most cities in India in the near future. Therefore, this competition has to be for the right to be the airport operator. Minimum subsidy mechanisms for the concessions to operate the airport need to be explored. Parking and landing charges at these remote airports might deliberately be kept low to enhance viability of airline operations from these airports. The nascent Airports Economic Regulatory Authority is meant to oversee airport tariffs, both air and city side.
Subsidising airlines in flying to these airports is trickier, since the subsidy mechanisms are linked to airport charges. Different versions of minimum subsidy schemes are possible, for individual airports, or clusters of airports, and so on. Other incentive mechanisms can also be explored. An equivalent of the proposed tradable Priority Sector Lending Certificates?currently being studied by expert committees for banks to meet their priority sector lending targets?might be devised for mandated airline routes. In particular, to make Northeastern routes more attractive, how about tax rebates on aviation fuel at airports in those states, to induce airlines to go there to tank up?
The point of all this is that modern economics offers incentive mechanisms that can squeeze out more efficiencies from the system. A combination of commercial pricing and efficiently delivered subsidies, as alternatives to administratively mandated route layouts, might result in the entry of new operators with completely different business models, innovative route planning, appropriate aircraft fleets, etc. As an operational reality, this was demonstrated by Deccan Airways, at least for many tier-3 towns.
However, the potential entry of new operators is likely to introduce both efficiencies and risks, including adherence to aircraft airworthiness and maintenance of standards, which requires strict oversight. This brings us to the final point on aviation safety and oversight of airline operations, including adherence to commercial conditions of the operating concession. The touchstone of this restructuring should be to minimise conflicts of interest, in an environment where commercial interest becomes more important. Also, the consequent separation of oversight of respective functions unfortunately increases the complexity of coordination between different regulators. Aviation safety mandates that ATC be completely hived off from the AAI. Accident investigation should be separated from the ambit of the DGCA. Airlines are notorious for predatory pricing by incumbents to deter new operators; this is correctly the ambit of the Competition Commission. Finally, transparency is a key pillar of effective regulation; standards have already been set by many regulators in India.
?The author is vice-president, business and economic research, Axis Bank. Views are personal