governance, political economy, institutional development and economic regulation

Posts tagged ‘civil aviavtion’

Fly India, fly

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Udan — the new regional air connectivity scheme — is not likely to get the aam aadmi (common man) to fly, but it will correct the historical wrong done to the air transport business in India. The hallmark of faux socialism was the targeting of some services and goods as “luxury” and by implication, anti-common man, anti-growth and pro-inequality.

Air transport was one such service. It’s early face was to serve the rich or the privileged. But all this has changed. Indian workers travelling from Etawah in Uttar Pradesh to the Gulf travel by road or rail to Delhi before taking an international flight. Why not facilitate them to fly straight from Etawah to Delhi, thereby securing their luggage end-to-end and avoiding the choking of our inter-state roads?

Udan is refreshingly simple and timely in its objectives. It is not populist even though it is being marketed in that manner. The “hawai chappalwallahs” would prefer to get subsidy in hand rather than as a low-cost air junket. Udan is not about giving the poor a taste of luxury, Evita Peron style.

Air transport for growth and jobs

Udan is about growth and jobs as the policy note avers up front. It quotes the International Civil Aviation Organisation (ICAO) that every rupee invested in civil aviation add Rs 3.5 to the economy and every job created directly generates 6.1 jobs indirectly.

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There is no reason to take the ICAO at its word. The ministry has been baking this scheme since November 2014. It should have estimated similar value and job multipliers in the Indian context. That could have better evidenced the benefits from the allocation of public funds on the “value for money” principle. But the economic rationale can be intuitively surmised.

What! India has more airports than commercial planes

There are as many as 398 “unserved” airports which have no commercial flights and 18 “under-served” airports host less than seven flights per week. One may well ask why this large number of airports exist if there are no commercial flights to them and who pays for their upkeep? Anecdotally, these airports have existed for the convenience of the elite political class for their infrequent “in and out” inspections, disaster surveys and election time visits to the hinterland. Less frequently India’s small business elite may also use a few.

Not all of them are owned by the Airports Authority of India (AAI), the Central agency which manages airports. Some are owned by the ministry of defence, others by state governments. It would have helped investors if the policy note had listed the ownership and management of each.

Democratise these public assets

So what are the likely benefits? First, commercialising these 416 airports will “democratise” publicly-owned sites which have hitherto been reserved for elite use. The average citizen would get a participative stake in their use and development. This is a vital aspect that policy note ignores.

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Rationalise air taxes & spend on infrastructure

Second, the government has rightly slashed taxes and charges on regional connectivity flights to narrow the viability gap. AAI will not charge any landing or parking charge and only 42.5 per cent of the route and navigation facilitation charge. The owners of these airports will similarly exempt such flights from all charges whilst ensuring the full package of airport facilities. Most of these charges are exorbitant in any case and need to be rationalised. Consider that AAI earns a profit after tax of around `800 crores. This surplus is better used for regional air connectivity than to subsidise Air India, which should be privatised.

Kick start new businesses and services in rural areas

Third, whilst Udan is branded as a new passenger facility, an additional business opportunity is the potential for moving existing perishable cargo, fragile goods and high-value export-oriented products by air. It is only a combination of passengers and cargo which can make the scheme sustainable. Public investments should be leveraged via private management model used for major airports. Investor consultations in state capitals being planned should include potential investors in airport management and development.

Fourth, some of the additional economic value and jobs are from developing these airports as growth centres. Providing secure and high quality road links, 24×7 electricity, clean water and sanitation are key for private management to step in with malls, airconditioned warehouses, hotels and new businesses which need secure air connectivity.

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Udan has got it right.

The Udan policy ticks all the right boxes. It retains the potential for business innovation by limiting the seats at the Udan price to 50 per cent of capacity. The remaining seats can be sold at market rates. Operators shall be chosen competitively via reverse auction for the minimum amount of “viability gap funding” (VGF) required. The policy is carefully and explicitly drafted to avoid ex-post disputes.

The policy is market driven. Flight operators must do their own due diligence and come forward with proposals which would then be put out to bid. If a proposer fails to submit the lowest bid, they could still win by agreeing to match the lowest bid. This provision preserves the incentive for initiating proposals, whilst retaining competitive energy in the bid process. In the past, in roads and telecom, irresponsible bids resulted in projects being abandoned subsequently. Most of these airports are challenges for business development rather than ready-baked money spinners. Hopefully, only responsible bidders would respond.

The policy carries forward the spirit of cooperative federalism. The Central government will fund 80 per cent (90 per cent in the Northeast) of the subsidy amount to be paid to the operators as VGF. The state government shall fund the residual marginal amount.

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Udan targets medium term dividends

It is a policy reform which does not just eye the popular vote. It courageously demolishes the economic posturing of the past and the earlier demonisation of air transport. It looks, instead, towards medium-term economic growth and job creation. Habitual leftists, dyed-in-the-wool faux socialists and related do-gooders are likely to label this policy a sellout in the name of the poor. But young entrepreneurs yearning for growth opportunities and young workers looking for good jobs should support it. Even those who are ideologically bound to oppose this policy are sure to use these services as they travel “cattle class” to the hinterland.

Adaapted from the authors article in the Asian Age, October 28, 2016  http://www.asianage.com/columnists/will-udan-be-able-make-bharat-soar-536

 

DGCA kills innovative, consumer friendly pricing by Air Asia

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Air Asia,the newest aviation kid on the block, got a taste of the heavy hand of Indian regulators even before it starts service on June 12. The Director General of Civil Aviation directed them not to implement their innovative initiative to charge only those passengers with check-in luggage for the service. The normal practice is to build-in the average cost of a 15 kg free luggage allowance whether one needs it or not.

Why DGCA was compelled to do so remains in the secret annals of the regulator which, being a government agency, hoards information on why decisions are made. There could be three possible reasons why this happened.

First, this unbundling of the checked in luggage charge was a departure from the norm. Babus hate such departures. The absence of the all-important “precedent” complicates life for them. A possible stint at Tihar, looms large in their minds, if their decision is perceived as favouring the licensee. This particular decision predated the assurance from PM Modi that babus need not be scared of retribution, unless it is deserved.

The key to effective governance is innovation. This “can-do” approach is foreign to the average babu DNA, across the world. But it is only innovation, which can reduce transaction cost and improve efficiency- both sorely needed in India.

The international experience in economic regulation indictates that intrusive regulation retards innovation. Nor does it help consumer interest, because the supplier is left with no incentive to increase profits by optimizing costs and maximizing revenue. Secondly, the entrepreneurial energy, which is unleashed by competition in the market, gets blunted if market forces are unduly restrained.

The Indian aviation market has more choice than two decades ago. But competition is still stifled by the “cartel” of five scheduled operators: Air India, Jet, Indigo, Go and Spice jet. To be fair, since their injection into the market, they have led on price discovery. Air India has been unable to compete and is accumulating massive loss, despite the advantage of preferential allotment of prime travel slots and destinations.

Cartels, like babus, hate “disruptive innovation” since it shakes up a stable financial equilibrium they have adjusted to over time. Consumers on the other hand look for such innovations in pricing which adapt to their specific capacity to pay. Think Hindustan Lever’s shampoo sachets.

Air Asia did just that. It slashed its inaugural tickets to negligible amounts. But it proposes to charge if you want to check-in luggage. This is welcome news for those on short trips, who carry nothing more than a briefcase. But it is terrible news for those who travel with a “colonial style” “bistra bund”. Air Asia proposes to allocate cost only to those on whose behalf they are incurred. Today the “bistra bund” lot free rides on the price paid by the “briefcase” lot. This is also bad news for passengers who consume their 15 kg free allowance but hang around, trying to pool their surplus luggage with other obliging passengers. Many obliged becuase their unused free luggage allowance was a sunk cost, till Air Asia came around.

Tariffs drive behavior. Airlines have already unbundled preferential seat allotment and food service with salutary effect on customer and staff behavior. Customers no longer jostle, pull rank or use influence to get the seat of their choice for free. Now its pay and get. Cabin staff, which previously used to throw free food and drinks at customers, like relief workers do at refugees, is now responsive to customer needs. Paisa bolta hai (money talks)

Possibly DGCA had concerns about Air-Asia duping customers into buying cheap tickets and then loading charges on them at the last minute, whilst checking in. This could have been dealt with by requiring the airline to (1) get a declaration signed from the customer that they are aware of the “no free luggage” clause and (2) ensured that in all advertisements of the cheap fares, the “no free luggage” clause is prominently displayed. After all airline customers have already got used to paying for their food and drinks on board and paying for specific seats. How is luggage so different?

A third concern, DGCA may have had, is of predatory pricing. This is what the existing “cartel” charged Air-Asia to be indulging in. At the very least the charge is odd. Predatory pricing is a strategy usually adopted by an existing dominant supplier, with huge sunk costs, to keep competition at bay. The fledgling Air Asia is hardly a likely candidate to invite the charge of predatory pricing.

Civil Aviation is a vital sector of the domestic economy. Viewed holistically, with railways, road and waterways; it is integral to an efficient multi-modal transportation system, each of which has a comparative advantage for a particular profile of passenger and cargo.

Unfortunately aviation continues to be viewed as a service for the rich. Aviation fuel is taxed punitively. The sector is ruled with a heavy hand by the DGCA-the government managed regulator. A report authored by Nathan Consulting in 2008 concludes that aviation needs to transition to more light handed and market oriented regulatory options, in the interests of enhanced competition and protection of customer interest.

The DGCA has erred in knocking down the very worthwhile innovation by Air Asia, which is perfectly in line with sound economics for the determination of fair and efficient user charges. At the very least, this reeks of an unsuitable, heavy handed, danda  wielding style of regulation. At its very worst, this action can be construed as undesirable collaboration with the “cartel” to “discipline” the kid in town- Air-Asia. In either case it has not brought glory to DGCA, which is more familiar with engineering safety concerns rather than the nuances of economic regulation.

One hopes, that the new chief babu in Civil Aviation and the new Minister will show the way and reward rather than retard dynamic and innovative pricing.

 

 

 

    

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