By Nandita Sharma / INN Bureau
Once touted as the sunrise sector, civil aviation is in a tailspin. INN on the nosedive from the dizzying heights. Three men and a mascot. They mark the glorious period of Indian aviation. They are also the very symbols of its downfall. The last decade saw the rise of privately-owned worldclass Indian carriers, only to see them going down. What we have now is one more sunrise sector on the verge of going bust.
What went so terribly wrong? Are adverse economic headwinds, high debts and faulty business models to be blamed for this decline, or is there more to it? Have policies been twisted to suit corporate interests? Has the government regulatory framework given into corporate demands? The answers perhaps lie in the way these stories tell themselves.
First, the three men.
Man 1. Considered the pioneer of modern civil aviation in India, Jet Airways Chairman Naresh Goyal’s story is awe-inspiring. Starting as an accountant in his uncle’s travel agency, Goyal rose to become the owner of what is today the biggest fleet of privately-owned aircraft in the country.
Jet Airways arrived in 1991 when the government announced its open skies policy, paving the way for private players into the aviation sector and, therefore, more competition. The then aviation minister Madhavrao Scindia too urged private airlines to expand their fleet during the strike called by Indian Airlines to oppose the government’s policy.
Many companies threw their hat in the ring. Headlines plastered across newspapers announced this exciting new development with photographs of shiny planes, airhostesses in short skirts and whiskey with breakfast on sunrise flights. But the bubble burst soon.
Pervez Damania, a rich poultry farmer from Mumbai, got a licence for an air taxi between Mumbai, Delhi, Goa and other cities. Within a year, Damania Airways had overspent and was finding it hard to get funds. The airline was eventually sold to NEPC India Ltd and died a natural death.
In another case, East-West Airlines, which received its air taxi licence along with Damania Airways, failed to meet payments. In 1995, Managing Director Thakiyudeen Abdul Wahid was shot dead by members of the dreaded Chhota Rajan gang. Unable to pay back the cost of the Boeings it had hurriedly acquired, East- West too had to shut shop in 1996.
Now, consider Jet’s arrival against this background and you can’t help but feel admiration for Goyal. But did Jet Airways owe its survival — and subsequent success — to other factors too? According to an aviation expert who sits on the boards of several prestigious firms, “Jet wanted policy to suit them. The routes, the capacity, the policy, all regulatory allowances from the Directorate General of Civil Aviation (DGCA) only favoured them.”
In an interview to CNN in 2005, talking on the need for lobbying, Goyal had admitted to the importance of being in close proximity with decision-makers. “I think in the US, people know how to deal with senators in Washington,” he said, “people in Boeing know, IBM knows, everybody knows. In England, people know. So it is nothing shrewd. You have to understand your system.”
Goyal understood the system well. “You had to be stupid not to succeed when you controlled the market and the scarce resources,” says Captain Gopinath, founder, Air Deccan. He points out that in India, to survive and do well in a regulated environment “one needed a few attributes, especially in the licence raj, including the ability to work with, and often manipulate, the government and be quick in accessing capital”.
Now, with the controversy raging around the Jet-Etihad deal, questions are being raised around this very ability of Goyal. The Rs 2,000 crore deal, where Jet sold 24 percent stake to the UAE-based Etihad Airways, has become the latest flashpoint in the troubled aviation sector. The deal gave Etihad a majority stake in Jet Airways’ frequent flyer programme, Jet Privilege, and Rs 378 crore towards three pairs of slots at London’s Heathrow Airport through a sale and lease-back agreement.
Jet also received a $300 million five-year loan at a very low interest rate. But what raised eyebrows was the bilateral decision that was taken to raise the weekly air seat capacity between India and UAE to almost four times from about 13,000 to 37,000. The government liberalised the weekly seat quota to facilitate this deal, signalling to the aviation sector that India-Abu Dhabi promises to be one of the busiest air routes.
And therein lies the rub. Although other airlines could tap into the sector, it will not be as lucrative for them as Etihad, which has Abu Dhabi as its hub and will be able to offer lower fares, effectively eliminating all competition.
From a policy standpoint too, the deal came under scrutiny after the Prime Minister’s Office (PMO) was dragged into it over the timing of the bilateral agreement, and importantly, for being skewed in the UAE’s favour. Goyal had met civil aviation ministry officials, including the aviation secretary in March in this connection. “This deal is a manifestation of all that has been wrong with the aviation sector in India,” says Jitendra Bhargava, former spokesperson of Air India.
That aviation big-timers have always had the ear of the power corridors is not new. But much more has gone wrong with the industry. High costs of operations, expensive parking and landing rights, high prices of air turbine fuel, almost no quality maintenance facilities (so much so that Indian carriers had to send their planes to Dubai for servicing) and high taxes have all led the sector to the mess it is in today.
BJP leader and former aviation minister Rajiv Pratap Rudy sums up the current scenario. “Indian policymaking has always been more focussed on individual airlines than the sector,” he says. “Vijay Mallya’s aviation model was faulty from the start, Sahara did not have the correct approach and made (Naresh) Goyal almost pay a ransom of Rs 2,000 crore when he bought the airline.”
Even as other players like Indigo, GoAir and SpiceJet seem to be benefiting from relatively leaner operating models — no-frills flying without free meals or blankets — they too admit the sector needs an overhaul for them to service customers competitively for a long term. The reason Indians can now carry only 15 kilos baggage and no more has a lot to do with the high operating costs mounting on their balance sheets.
How did things come to such a head and when? A large part of the blame would go to retrograde policies and extra costs. A banker familiar with the aviation sector says that “most airlines in India have often forgotten who makes up their market. It’s those migrating from buses and trains. Indigo, SpiceJet and other budget carriers have come and proved this to Jet and Kingfisher, who became victims of sexy marketing”.
Man 2. While Goyal and Jet continue to fascinate, the Kingfisher Airlines story makes for one of the most depressing reads. “I can see why some would call Vijay Mallya a pariah,” says Saj Ahmed of Strategic Aero Research, “with employees going for months without pay at Kingfisher, now a grounded and all but dead airline. Away from the bravado of air shows and big orders that will never be realised, Kingfisher has no one else to blame but itself for its failure. The idea was novel, but the execution was nothing more than a vanity exercise gone horribly wrong.”
Mallya began his airline with a rush to buy planes. Starting with four to five planes, he ordered another 100-odd in no time. For the rest of the year after its launch in 2005, KFA got the delivery of one Airbus A-320 every month. Until March 2012, the airline had over 60 pending in orders and about 92 planes flying, including a fleet of smaller ATR aircraft. In his quest for style, Mallya took the ‘customer-at-any-cost’ approach. And these costs were high. From food to in-flight entertainment, the cost per passenger was “double of what Jet was offering”. It was a case of excesses over financial discipline.
Within two years of the airline’s operations, no one knew what Kingfisher stood for. The airline went from high-end economy class travel to an unsustainable luxury business class airline.
Mallya’s desire to take the airline overseas has also come in for sharp criticism. He wanted Kingfisher to go neck-and-neck with Jet Airways, which had already launched its global operations. Since Indian aviation rules need an airline to complete five years of domestic operations before it can take flight internationally, Mallya decided to take the short cut in 2007 by buying out Air Deccan, which had completed its five years of operations. The deal proved to be a dream for Deccan and a deadweight for Kingfisher, which spent Rs 550 crore for a 26 percent stake, valuing the budget airline at Rs 2,200 crore.
Ego over business is what the Jet versus Kingfisher script had become. Goyal bought Sahara Airlines so Mallya couldn’t, and Mallya rushed to buy Deccan so he could beat Jet by flying overseas ‘in style’. As a banker explains, this ego rush shouldn’t have come to entrepreneurs with prudent business sense. “To a certain extent, they could take financial risks because they had political might,” he says. “A bit like too big too fail?”
Man 3. Unlike Mallya, Subroto Roy beat all odds when he sold Air Sahara to Jet Airways in an expensive deal (which sat on Jet’s books to create massive debt). But Roy’s arrival in the aviation sector was viewed with suspicion — his chit fund background was for a large part responsible for this scepticism.
In 2001, Roy rebranded his failed airline- helicopter service started in 1993 to Air Sahara and started flying across India. By 2005, the planes were flying international. It was then that the problems began. Sahara was struggling for cash. Many employees had quit in favour of new airlines. A third of its fleet was grounded due to technical reasons. Industry players were already writing Sahara off. Then Jet happened.
In 2006, feeding onto Naresh Goyal’s desire to beat Kingfisher from grabbing more traffic, Roy sold his airline to Jet Airways for a handsome $500 million. Later, in an interview to a magazine, he said, “Low-cost airlines work only for some time. These things work temporarily. For the long term, there should be a constant study on the demand and supply dynamics. I am very happy we got out at the right time, we also got money for that, good money.”
The Mascot. If Jet, Kingfisher and Sahara are stories of hubris, inflated egos and greed, Air India is a textbook story of government mismanagement. “As the owner of Air India, the government has rarely done the right thing to keep it viable,” says Cyrus Guzder, an aviation expert with the Indian arm of Air Asia. “Over time, the national carrier has been allowed to go weak, when private carriers have been allowed to grow.”
During the UPA-1 government, under the then aviation minister Praful Patel, Air India placed an order for 111 aircraft from Boeing. This expansion was in excess of the airlines’ own fleet plans and cost over $8.7 billion when it was showing sales of around $3 billion. The CAG expressed concern at the ministry’s decision to brush aside the objections raised about its assumption that higher capacity would automatically result in higher market share. This deal came under severe media and parliamentary scrutiny and would haunt Patel for a long time.
The CAG was also critical of the bilateral agreements the aviation ministry signed in the years following 2004, giving big advances to international carriers as Air India’s fleet expansion happened over time. By the time Air India got its planes, the market share was already taken up by other airlines.
Since then, despite bailouts, the government has protected the national carrier without really letting it take full flight. At a time when Air India had the opportunity to fly overseas and capture market share on international routes, private carriers were let in. Later, the government experimented with Air India Express, which was a disaster from the start because it entailed buying yet more planes for an airline already overleveraged on purchases.
Enough has already been said about the doomed Indian Airlines-Air India merger, which was done on the pretext of increasing efficiency. Praful Patel announced there would be no redundancies. What good did it do to merge two white elephants and not cut excess capacity remains an enigma even today.
In an inversely proportionate kind of way then, Air India was central to the growth of private airlines. Failure of the national carrier fanned new private players.
“I don’t think the private sector works in a vacuum,” says former commerce secretary Ajay Dua. “Conditions were created to an extent when government carrier Air India became so inefficient that private carriers began to thrive.”
According to Kapil Kaul, CEO, CAPA South Asia, there are three problems created by the government: “A negative cost regime, lack of a civil aviation policy with a poor regulatory framework and low competence levels, and no long-term planning for developing infrastructure, including human resources.”
“The government has much to explain,” says Air Asia’s Guzder. “They have refused to announce an aviation policy or guidelines for the industry. This means entrepreneurs eager to enter the sector must also be open to the risk that the policy may change anytime. How can people be asked to invest billions of dollars in planes without a policy in place?”
Air Asia, which is now entering the Indian market in partnership with the Tata Group, is hoping to add to the competition but plans to go slow and steady. Tony Fernandes, founder of Air Asia has been quoted recently as saying “vested interests and negativity from within the airline industry” have been responsible for lopsided rules.
Billionaire to Millionaire. Virgin Atlantic Founder and Chairman Richard Branson had famously commented that “if you want to turn from a billionaire to a millionaire, start an airline”. In many ways, his words have come true in the Indian context. While some players have seen the wisdom in this statement and made the most of their opportunities, India is also on the fast road to “millionaire from billionaire”. According to aviation research body CAPA (Centre for Asia Pacific Aviation), in the past six years, Indian carriers have already lost over $10 billion.
Seen against this backdrop, the decision to not increase FDI in this sector from 49 to the expected 74 percent does not come as a major surprise. According to Dhiraj Mathur, aviation expert at PricewaterhouseCoopers (PWC), we were already three years too late on it. “We didn’t just need it for the money but also for talent and expertise,” explains Mathur. “Today the sector is starved of people who understand how to run aviation operations.”
Ironically, Naresh Goyal was among the first ones to oppose FDI in aviation, and yet now, he is the one who would have benefited the most from it. It is puzzles like these that need to be solved before we get down to fixing the board for a fresh round again. Until that happens, Indian aviation will continue to fly low.
