It is easy to identify an industry in crisis?when it starts asking the government for subsidies. The airline industry has now joined the chorus for help with the oil industry for reasons which are not dissimilar?mostly soaring global prices of crude oil but also the government?s fuel policy in general. There is little doubt that the airline industry?s profitability has taken a severe hit through the rising cost of aviation turbine fuel (ATF). ATF prices may have actually risen by around 100% in the past year and the cost of jet fuel constitutes around 40 % of the total operating cost of the average airline in India. ATF prices are also much higher in India than in most other countries. This is where government policy, which restricts the lifting of ATF abroad, plays an important role in making things more costly for the industry. The industry estimates losing Rs 4,000 crores last year and this year is likely to be worse, with many operators expecting to go bankrupt.
The government, however, will be well advised not to dole out subsidy. Subsidies to the airline industry have proved to be gigantic failures in other parts of the world. The US airline industry, since 2001, is the best example of this. But plenty of examples abound elsewhere?Sabena in Belgium finally went bust despite extensive government aid and Alitalia has shown no improvement in its long term financial health despite continuous subsidies. If anything, subsidies cause a moral hazard problem and prevent airlines from taking the necessary measures, often harsh, to increase their efficiency and profitability. Budget airlines need to relook at the sustainability of their business model?for example, unlike in the West, they do not use less costly airports, and hence pay the same taxes and fees as regular airlines. There is also scope for consolidation in a fractured industry, which would yield cost economies of scale. The government can lend a hand?refuelling abroad should be allowed, some taxes can be reduced and a reform in bankruptcy law towards a Chapter 11-like system in the US would give firms going bust some time to restructure before their creditors liquidate them. A crisis is often an opportunity for change?the airline industry should grab it with both hands and the government should help, but not with its wallet.
