governance, political economy, institutional development and economic regulation

 

solar plane

Solar Impulse 2 touches down in Spain completing a historic trans Atlantic flight. photo credit: dispatch.com

Air India recently made headlines by offering last-minute unsold seats at the price of AC rail tickets. It makes a lot of business sense for the national carrier: every marginal rupee it earns adds to its bottom line. More important, the fact that its bottom line is attracting leadership-level eyeballs is welcome for a state-owned company that budgeted for government support of Rs 19,900 crores over the 2012-16 period.

This new initiative could bomb if it makes regular air travelers, who are time flexible,wait till the last minute to book tickets. This would squeeze revenues further. But if it induces rail travelers to fly instead, it will be a win-win. This is a calculated risk that must be tested. What is more significant is that it signals the Maharaja’s changed can-do business-oriented approach.

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Disruptive pricing or funded wars for market-share

Disruptive price innovation in passenger travel as a whole is a welcome move to squeeze out hidden value. This should be distinguished from the price war unleashed by private low-cost airlines a decade ago, and again in 2014, to gain market share within aviation. As the e-commerce market has found, funding losses to push out the competition quickly reaches the endpoint. Air India, a full-service airline, unlike some private carriers which levy hidden costs for baggage, seat allocation and food, should be encouraged to go further and explore all commercial options for expanding the air travel pie. Pulling away rail travelers, willing to pay AC fares, to fly instead is a good one.

Less than one per cent or 60 million inter-city travelers choose to fly. For most, the higher cost is the barrier. But for significant numbers easy connectivity is also an issue. Civil aviation is the neglected child of the ersatz socialism we have long practised. So deep is the association of private enterprise and markets with the rich that even this government, with its massive mandate, has to battle populist urges to stay on course with its reform agenda.

The socialist bias against air travel

Till just two years back, the thought of air travel competing with trains was a fantasy. Seen through the binary vision of poor versus non-poor, air travel is a luxury used mostly by the non-poor. Imposing penal taxes on air travel is therefore only a natural corollary of this bias.

The good news is that such mindsets are changing. The Union government has worked quietly but effectively since 2014 to convince state governments not to levy penal taxes on air turbine fuel, which cripple expansion of this sector. The fuel cost is 50 per cent of an airline’s total costs. State governments earlier saw air travel as a cash cow and levied VAT at penal rates of up to 29 per cent.

Government intervenes to correct the tax disincentives

But now several states, most affected by poor connectivity, wisely responded to the Union government’s efforts to de-demonise air travel. Orissa, Madhya Pradesh, Chhattisgarh, Jharkhand and West Bengal slashed VAT to nominal levels in late 2014. Even CPI(M)-ruled Tripura was persuaded to reduce VAT to 18 per cent. Around 50 per cent of air traffic today and the bulk of profits are from flights linking the seven large metros. The need for better regional connectivity is obvious in a country of India’s size, that is also saddled with our dodgy surface transport infrastructure. Travelling from Kanyakumari, on the Indian Ocean, to Jammu, just below the Himalayas, or from Dwarka, on the Arabian Sea,K to Dibrugarh in Assam takes at least three days by train and even longer by road.

The Centre has launched a parallel scheme to improve air connectivity by creating a special fund to finance the gap in financial viability for linking Tier-2 and Tier-3 cities by air. There are around 50 of these. The pity is that this initiative is seen as fulfilling a social objective. This is an effective way to kill the long-term sustainability of air operations on these routes.

Regional air travel a wooly “social” objective  or just good economics?

Regional connectivity shouldn’t be branded as a populist goody. Air connectivity drives and contributes to growth and decent jobs. Globally, every job created directly in civil aviation leads to an additional six jobs indirectly. Only a link with growth will induce serious air operators to see the proposed subsidy as an initial sweetener rather than a perpetual crutch. Faster and better passenger trains are an option too. But it will take at least two decades to build upgraded rail tracks and the appropriate rolling stock. Our fastest passenger trains run at an average speed of only 80 km/hour. High-speed trains of the type envisaged between Mumbai and Ahmedabad and later between New Delhi and Varanasi can be viable only on high-density routes. These also cost a packet. The intrepid Elon Musk of the SpaceX rocket venture; Tesla Solar Wall and automated electric car, envisages a disruptive technology – travel by Hyperloop — an elevated tube mounted on pylons with passenger pods pushed through at hyper-speeds using electro-magnetic waves.

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The ball park estimate is a capital cost at $6 billion, just a fraction of the $68 billion, planned to be spent on the high-speed rail link between Los Angeles and San Francisco. Musk concedes that beyond 1,500 km, air travel would still be cheaper.But this innovation in transportation is yet to be piloted and tested. Commercialization is unlikely before 2030 though Musk is pushing for 2020.

Air travel also more safe and easy to secure than surface transport

In lightly-policed countries like ours, the security and safety of ultra high-speed inter-city passenger trains is a matter of some concern. Air travel is more difficult to cripple and offers higher security levels as it is off the ground. It is suitable for connecting urban growth hubs at distances beyond 500 km under our “enclaved pattern” of development

The Maharaja has kicked-off its strategy to meet the competition in a fiscally sustainable and affordable manner. More power to the elbow of the civil aviation leadership to grow the pie of the air travel business.

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Adapted from the authors article in the Asian Age, July 18, 2016 http://www.asianage.com/columnists/incentivise-air-travel-new-links-will-boost-growth-825

 

Comments on: "Don’t demonise air travel" (1)

  1. Sometimes I catch myself thinking just how crazy it is that planes actually work and are as high-tech as they are!

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