Touchdown to nowhere. Who killed aviation?

Crony capitalism manifests itself in many ways. One way it reveals itself is when someone betrays the supreme ability to act as if nothing has happened and all is well even when the Emperor is without clothes. A classic example of this trait was on display in the last week of May. V Raghunathan is the head of the GMR Varalakhsmi Foundation and writes a column for The Economic Times. In his column on May 26, 2012, this key executive of the GMR Group wrote: “Corruption, sloth, misuse of power, muscle flexing, delays, unresponsiveness and red tape are the typical things we encounter every time we deal with our bureaucratic machinery. This is unfortunate. But more unfortunate is that when we do occasionally witness a polite, functioning and efficient segment of the machinery, it goes unnoticed and unapplauded.”

Raghunathan was describing a pleasant and happy encounter he had with a customs official at Hyderabad Airport. Incidentally, the airport is operated by a consortium led by GMR.

In the same week, a report by the CAG on the Delhi Airport (operated by GMR as well) privatisation was leaked to the media. One of the many conclusions drawn by the CAG report is that “ … this is not only a violation of the commitment in the Cabinet Note but is also a unilateral and unfair advantage given to DIAL (Delhi International Airport Ltd), which is detrimental to government interest.” DIAL is the private company promoted by GMR. It won the contract to modernise and operate Delhi Airport in 2006. The original cabinet decision to privatise the airport was taken in 2003 when the NDA was in power. The decision had been to let the private operator manage the airport for 30 years, subject to another 30-year-lease on mutual agreement and negotiation of terms. In 2006, GMR was given a straightforward 60-year-lease.

There are even more shocking details in the CAG but perhaps we are so numbed by the number, extent and magnitude of graft since the 2G and Commonwealth Games scams that we seem to hardly notice what really is happening in this banana Republic of India. Raghunathan of GMR is an honourable man and he writes a good column. But the irony of him writing on corruption even as the CAG implicitly accuses his company of sweetheart deals would not be lost on anyone.

Every which way you look, the once promising and explosively growing aviation sector in India is in serious danger of crash-landing. Airlines are bleeding red ink even as passengers are paying through their nose. International carriers, which were adding dozens of flights to and from India, are now doing a rethink. Air travel for the common man – a dream once virtually turned into reality by entrepreneurs like Capt. GR Gopinath of Air Deccan – is now once again a dream. Two out the four big domestic airlines – Air India and Kingfisher – are virtually bankrupt. Relief from this never-ending turbulence remains elusive.

Analysts who track aviation are cagey when it comes to going on record about how this promising industry became such a mess in just a few years. But they do whisper about the fact that it was NCP leader Praful Patel, during whose tenure these decisions were taken. But it would be unfair to single out Patel for blame. A recently released autobiography of the retired bureaucrat MK Kaw, who was also a civil aviation secretary, has many interesting revelations. He writes: “It is a fascinating saga of benami ownership of airlines, demands for bribes, destruction of all rival airlines one by one, unwarranted purchase of aircraft, mismanagement by bureaucrats and politicians, free jaunts on inaugural flights, subsidised travel for many categories of travellers, VVIP flights, Haj flights and so on. It is a story of shameless exploitation and ruthless corruption.” The book by Kaw also details how the same canker derailed the dreams of Ratan Tata to operate a world class airline from India. The Tatas had floated a proposal for a private airline with 40 per cent equity contribution from Singapore Airlines. As this would have been a formidable competitor, Jet tried hard to upset rules regarding foreign equity contribution. The civil aviation minister during those days was Karnataka politician CM Ibrahim. There are stronger words that the former civil aviation secretary has used in his book, and even more stinging indictment of how the civil aviation ministry has been the epitome of crony capitalism. He writes, “The country does not have a civil aviation policy even today. It is the considered the view of many experts in civil aviation that FDI investment will not be allowed in India till this is permitted by the powerful owners of Jet Airways.” Ratan Tata himself has gone on record to say that his joint venture deal with Singapore Airlines was killed by vested interests.

  

The strange thing is, despite such glaring examples of favouritism in the 1990s, the Indian aviation sector was on a song till recently. The launch of Air Deccan in 2005 marked the beginning of a new era in Indian aviation. Flying was no longer the privilege of the rich, the elite and those with expense accounts. The chart included in this story shows how explosive the growth of civil aviation has been in India over the past few years. From 17.5 odd million domestic passengers in 2000, Indian carriers flew 44.3 million in 2007 and 60 million in 2011.

But things had definitely gone downhill even as air traffic was exploding. And there is absolutely no doubt that middle class India is very angry at the manner in which the aviation sector is being ruined. Team C Voter conducted an exclusive opinion poll on behalf of The Sunday Indian across major Indian cities to gauge  the public mood on the state of Indian aviation. The results have been revealing. Close to 60 per cent of respondents say that politicians are responsible for the mess in aviation. That is an unmistakable message for former ministers like Ibrahim, Ananth Kumar and, most notably, Praful Patel. Almost 9 out of 10 respondents say that they can no longer afford to fly. About 3 out of 4 passengers say that the fee hike imposed by operators like GMR is unjustified. Almost 80 per cent of the respondents are convinced that there was something very fishy in the deal to privatize Delhi Airport and hand it over to GMR.
It is not as if the media and aviation analysts have not pointed out the strange things happening to Indian aviation during the tenure of Praful Patel. In August, 2010, a magazine called gFiles carried a cover story that created quite a stir. The headline on the cover that featured a photo of Praful Patel was: “How Praful Patel bankrupted India’s flagship carriers to help favoured airlines and then asked the government for a Rs 50-billion bailout.”

The most controversial decisions taken during the Patel regime remain the merger between Indian Airlines and Air India, the privatisation of key airports and indiscriminate landing rights (called bilaterals) given to international carriers without getting similar rights for Indian carriers.

The merger of Air India and Indian Airlines initiated by Patel has been questioned in Parliament as well. The 151st report to the Standing Committee of Parliament on the merger of Air India and Indian Airlines in March 2010 chaired by Sitaram Yechury noted that it is not convinced with the arguments of the government to justify the avoidable delays in taking the process of merger with the required speed and manner. The merger happened in August 2007 when Patel was the aviation minister.

“The Committee fails to understand how two major avowed objectives of the merger – ‘economies of scale’ and ‘increased leverage’ – could be accrued without achieving proper synergies,” the report says. The fleet configurations of both Air India and Indian Airlines are different. The Air India fleet consists of Boeing aircraft of medium and long range, which are being normally used for long distance international destinations. The Indian Airlines fleet consists of Airbus aircraft, which are suitable for short-range distances, predominantly for the domestic destinations. Both these operators also drew fleet acquisition plans on the basis of their operational requirements. “Operating crews, engineers, technicians and other technical personnel who are trained and certified on the Indian Airlines fleet cannot be utilised on the aircraft of Air India, which operates a different type of aircraft....” the report further noted.

  

As a result of the failed merger, after enjoying a monopoly during the 1990s, Air India today has just 17.6 per cent market share and ranks fourth in the airlines’ pecking order. It has a debt burden of Rs 46,950 crore, Rs 201,185 crore worth of aircraft loans, Rs 22,165 crore working capital loans and dues amounting to Rs 4,600 crore.

The most deadly blow to Air India and Indian Airlines came from Patel’s decision to parcel out bilateral rights to select foreign carriers like Emirates and Lufthansa, whose business models depended largely on passengers being flown via their hubs in Frankfurt and Dubai at cut-rate fares. No country on earth does this kind of indiscriminate parceling out of bilateral rights.

Noted aviation expert Mohan Ranganathan, who spoke to TSI said: “The merger is the single factor that ruined Air India and Indian Airlines. Their assets – besides the real estate housing their operations – were the bilaterals. By selling out the bilaterals to foreign carriers when AI or IA could not match the competition, the ministry and the airline management started the rapid downslide. Without the cushion of the assets, the merged entity never had a chance to recover.”

The CAG in its report tabled in the Lok Sabha last September noted that one of the main reasons behind Air India’s present plight is bilateral air service agreements, mainly with some Gulf countries. In fact, the actual utilisation of available rights on international sectors was highly imbalanced. While utilisation by foreign airlines was around 65 per cent, that of our airlines was only around 30 per cent; as a result, foreign airlines derived disproportionate economic advantage out of the traffic rights. Further, out of 100 countries with which India had ASAs, airlines of 51 countries operated to India, while Indian carriers operated only to 25 countries. The CAG report questioned how these lopsided agreements that did not create any advantage for Indian carriers went unnoticed by the Ministry of Civil Aviation.

Clearly, the MoCA projected misleading demand for seats in opening up routes for foreign airlines. The creation of Air India Express during Patel's tenure eventually destroyed  the first and business class traffic of AI and IA to the Gulf and South-east Asia. Some other missteps during Patel’s stint included giving Air Arabia and Lufthansa a disproportionate access to the large Indian market, which analysts believe were accorded without going through the established route of bilateral consultations, which involve other ministries such as the Ministry of External Affairs.

But not everybody lays the blame for the current plight of AI and IA on Patel's doors. Says a well-known aviation observer who spoke on the condition of anonymity: “South-east Asia, the European Union and the US routes were a monopoly of Air India. All these were opened to private operators to stimulate competition. The lucrative Gulf routes were opened subsequently. This was all part of the liberalisation process. AI cannot claim these routes as their birthright. They have to compete to win.”

In the privatisation of airports programme, the magazine g Files pointed out that land to the developers were sold for a song. For instance, the cost of land at Mumbai and Delhi airports was sold much below their prevailing market value under the guise of public-private partnerships. The beneficiaries of these sweetheart deals were GVK Power & Infrastructure and GMR Industries. Reportedly, the Airports Authority of India conducted no cost survey or price evaluation of the land before entering into agreements with GVK and GMR.

In January 2006, the consortiums led by GVK and GMR were awarded the work to operate, develop, design, construct, upgrade, modernise and manage the Chhatrapati Shivaji International Airport (CSIA) in Mumbai and the Indira Gandhi International Airport (IGIA) in Delhi respectively, on land owned by the Airports Authority of India.
Taking into account these past developments and the consequences arising thereof, it is easy to guess why the Indian aviation industry finds itself in such deep trouble now. Obviously, the sins of the past decisions of ministers and bureaucrats are now coming home to roost. Bad decisions have a way of coming out of the woodwork to haunt the present. The aviation industry’s sliding fortunes perhaps bear an eerie resemblance to what is also happening with the telecom sector, which too is witnessing a decline in its fortunes due to past policy cock-ups. The travails of these sectors throw up plenty of hard lessons. The question is, are our policymakers willing to learn and take the hard decisions to set aright things that are fast spinning out of control? Let's pray for better sense to prevail.