Sunday, June 23, 2024

Go First Airline’s Bankruptcy Reveals Perils Of Indian Aviation Liberalisation

By Aritra Banerjee

Go First, formerly known as Go Air, has taken a sudden plunge into bankruptcy, adding another chapter to the troubled history of India’s civil aviation since embracing liberalisation. While the airline points to the problematic Pratt & Whitney engines as the primary cause of its downfall, its financial demise aligns with the fate of many predecessors.

Go First has been grappling with losses for years, accumulating debt to survive. Per its bankruptcy filing, the airline’s debt burden amounts to a staggering $800 million, with a significant share owed to public sector banks. While the faulty engines may have acted as the tipping point, Go First’s financial woes run deep.

The advent of private airlines in commercial passenger and freight services has witnessed the failure of over two dozen carriers, with some never even taking flight. The prominent casualties include Air Deccan, Jet Airways, Kingfisher, Modiluft, NEPC, Paramount, and Sahara. The sheer number of failures is remarkable, but what is even more striking is the relentless influx of private players.

The entry and exit of numerous private competitors were hailed as proof that the government’s monopoly on national and international airline operations, which prevailed before liberalisation, suffocated competition, resulting in exorbitant prices and lacklustre service.

However, according to leading industry watchers, this perspective overlooks the vital role of public ownership, driven by a broader agenda beyond profit and a mandate to ensure regional connectivity. The general carriers ventured into high-cost, low-revenue routes, guaranteeing national connectivity. Additionally, during the early years of independence, the scarcity of private players rendered public airlines indispensable for establishing a robust national carrier.

Privatisation’s Toll On India’s Aviation Industry

According to C. P. Chandrasekhar, a Professor at the Centre for Economic Studies and Planning at the Jawaharlal Nehru University, the push for competition through private entry in India’s aviation sector has come at a significant cost. Airlines slashed prices to attract passengers and implemented cost-cutting measures to achieve profitability or mitigate losses. However, turning a profit has remained an elusive goal for most carriers. Volatile fuel prices and escalating costs have often led to alarming losses, ultimately resulting in bankruptcy and liquidation.

Liberalisation and private entry advocates have argued that the industry would eventually undergo a shakeout, leaving fewer players earning respectable, albeit not exorbitant, profits. Despite occasional failures, mergers, or takeovers, the market has always been excessively saturated with airlines. New firms and investors continue to enter the industry, driven by various factors.

The allure of leasing aircraft instead of purchasing them helped limit sunk costs in a financialised world. Government policies have been carefully designed and continually tailored to favour private entrants, while regulatory leniency enabled cost reductions at the expense of service quality and safety. Moreover, credit from the public banking system has appeared readily accessible.

Each new operator gambled on establishing a foothold in a competitive market presumed robust enough to generate profits. The overall strategy accepted financial bleeding as usual before achieving stability and success. However, fierce competition driving down prices and uncontrollable costs such as aviation fuel turned failure into the norm, even for previously perceived “success stories” like Deccan Air and Jet Airways.

This trajectory was only possible with extensive government support, which kept financially unviable firms afloat through various means. Aviation fuel prices and associated tariffs were suppressed, regulations were relaxed to trim costs, and pressure was consistently exerted on the public banking system to extend loans to these enterprises. Such an environment fostered deviant behaviour among profit-seeking businessmen, including account manipulation, delayed payments, mistreatment of customers, and the diversion of bank funds for personal enrichment.

The Central Bureau of Investigation (CBI) has recently searched the residences and offices of Jet Airways founder Naresh Goyal, his wife Anita, and former airline director Gaurang Ananda Shetty. The investigation focuses on allegations of bank fraud and the diversion of funds totalling Rs. 538 crores, suggesting the possibility of private enrichment even amidst the airline’s failure.

Aviation Liberalisation: Balancing Open Markets & The Perils Of Failure

Prof. Chandrashekhar believes that two crucial factors have shaped the dynamic landscape of India’s aviation industry. Firstly, the unwavering commitment of the government to achieve success in civil aviation liberalisation is evident in the extensive measures and costs incurred during the privatisation of Air India. The overarching goal of fostering an open market, ensuring affordable air travel, and promoting the presence of multiple operators has remained steadfast across successive governments, underscoring a resolute embrace of competition.

However, as experience has demonstrated, pursuing “competitive markets” often leads to failure. Ill-advised decisions resulting in surplus capacities, cutthroat price wars eroding profit margins, and poor management have all contributed to losses and bankruptcies. Despite mounting evidence, the government has shown reluctance to reverse course, futilely attempting to forestall such outcomes.

The second influential factor shaping the government’s stance lies in recognising that the closure of an airline, particularly those with significant market clout, triggers substantial collateral damage. Passengers who have grown accustomed to affordable air travel options witness their accessibility diminish, albeit temporarily, on specific routes.

Pilots and staff endure delayed salaries and substantial arrears when closures transpire. Meanwhile, banks burdened with extensive loans are grappling with considerable non-performing assets. These challenges cast doubt on the legitimacy of liberalisation and privatisation, compelling concerted efforts to curtail failures and dissuade reassessment of the liberalisation process.

Nevertheless, the formidable reality presents an ongoing challenge, with other failures remaining a distinct possibility. Nonetheless, industry stakeholders maintain an optimistic outlook regarding substantial profits. Prof. Chandrashekharan opines that emboldened by the acquisition of Air India, the Tata Group has boldly charted a course forward by placing an immense order for 470 aircraft from leading manufacturers Airbus and Boeing. However, recouping such a substantial investment is poised to take time and effort.

Undoubtedly, the conglomerate banks on the burgeoning expansion of India’s air travel market and strives to achieve dominance over competitors. By successfully navigating a treacherous path that has proven elusive for many, the Tata Group seeks to fortify its position within the industry.

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