In the last two days, there have been stories coming out of India regarding regulators and airfares. The first reported that the Indian DGCA told Spicejet to stop offering extremely low fares. The carrier had offered fares as low as 1 rupee. The second highlights a report that the Competition Commission is investigating identical airfares, because airlines are pricing their routes identically. In India, government regulators are apparently in conflict with each other.
This is what happens when government has too much control over markets. Spicejet is told not to innovate, yet when it prices at the same levels as other carriers, which the regulators apparently want, it is investigated for collusion with the rest of the industry.
The major problem in India seems to be, as usual, governmental regulatory bodies. The DGCA has been downgraded by the US FAA as not having proper capabilities to oversee the industry, restricting Indian carriers’ ability to add flights to the US, prohibiting code-shares, and adding surprise inspections of Indian airlines which land in the US. This is a sign of managerial incompetence.
Of course, when the government owns perhaps the world’s most inefficient airline, Air India, and protects that company like a sacred cow, irrespective of the facts, a fair and open market cannot develop. The political patronage jobs at Air India, a lack of productivity, and under political influence and micromanagement all point to the need for privatization. Perhaps the best example is the report this week that Air India is cannibalizing a 5 year old Boeing 777-200LR, here. Airlines don’t routinely ground expensive and modern five year old wide-body airplanes.
Air India plans to join the Star Alliance this year, after an earlier attempt in 2011 that was suspended by the alliance. This could be a potential benefit to Air India, as it would open new opportunities for code sharing and connecting passengers into India. But is Air India really up to snuff? Let’s examine the relative productivity of Star Alliance airlines and contrast them to Air India in terms of aircraft, revenues, revenue passenger kilometers, and revenues per employee, and see how Air India stacks up.
In terms of passengers per employee, Air India would rank dead last, as shown in the following chart.
In terms of revenue passenger kilometers per employee, it also ranks dead last.
In terms of revenue per employee, a measure of productivity, it also ranks dead last.
Only in employees per aircraft does Air India not rank dead last. Only majority state-owned and heavily employee owned Thai Airways has more employees per aircraft than Air India, and itself is restructuring to avoid losses, as shown below.
The net result is quite clear. Air India would be the worst performing and lowest productivity airline in the Star Alliance.
Bottom Line: As long as the Indian government continues to interfere in the operations of its domestic airline industry and subsidize Air India’s massive losses year after year, the country will not develop a strong international carrier to effectively compete on a global scale. Even membership in the Star Alliance, with its attendant benefits, won’t change the financial performance of an airline that is simply not productive. With Air India pricing domestic flights under cost, undue pressure is placed on private competitors, the one bright hope in the Indian market. We don’t see much hope for Air India as foreign airlines will continue to take a larger and larger share of the Indian market, while the myopic regulators stand by and watch the situation further erode.
Oh dear, someone seems to have a pet peeve here.
The Spicejet adverts are misleading as they only advertise the base fare, where the final fare with all invented surcharges and real taxes quickly adds up to 4000-5000 Rupees, ie. Misleading of customers, which a regulator has to intervene and check, even in free markets.
You might want to double check the facts behing the FAA ruling, its not just the DGCA.
AI has a lot of employee, so has TG, big deal, its a shaky metric to base everything on. In the end even with their cushy pay scales, AI employee cost far less than the average employee in the western world, where carriers outsource everything down to the gate agent.
The current misery of the 77L fleet is due to a bad buying decison: AI purchased 77L, 77W and 787 from Boeing after a long process, and thanks to low yield and high fuel prices the 77L is pretty much useless for AI to operate on ULH routes. The market for 77L aircraft is so bad no one is willing to buy them either.
No doubt AI is a major cluster of an operation, but I don’t buy the arguments you make.
I agree with Oliver2002. The metric chosen is too narrow. You must keep in mind that in developing countries like India with large populations, jobs are a major issue. Employing more people even if it means low “productivity” is often the right thing to do. If India automated everything and laid off a lot of people, where would those people go to earn their living? Unlike US, there is no safety net there for unemployed people. In any case, judging AI by narrow measure more suited to the wealthy west is simply not right. Besides, labor costs are not a major factor in operations there. Fuel cost is, since almost all petroleum it needs has to be imported by India. All this does not mean that AI could be more efficient and treat its customers better. But that is a different issue!
Ernest there are a lot of truths to your conclusions that the government’s protection of Air India does have impact on the policy and therefore the other airlines in India. There is no doubt that Air India is molly-coddled and given bailouts, but the reasons are because AI is less of an airline and more the NetJets of the Government of India. The powers that are have at their disposal a multi-billion enterprises with absolutely no accountability to the tax-payers whose money they are blowing up.
However, I think your employee numbers may be off and this is distorting metrics and therefore the basis of your analysis. Air India hived off its engineering and ground handling in to different subsidiaries in Feb 2013, and therefore the the number of employees per aircraft has reduced from about 237 to around 100. Your graph still relies on the old figures.
From a Mint report “On 18 December, junior aviation minister K.C. Venugopal told Rajya Sabha, the upper House of India’s Parliament, that the aircraft-employee ratio at Air India was 1:237 in January 2012. Once the firm separates its engineering and ground-handling activities, the ratio will improve to 1:92, the minister said.” http://www.livemint.com/Companies/Lo2EQBTMgtHG0ApxmNbuDM/Air-India-hives-off-engineering-ground-handling-subsidiarie.html
From the Business Today magazine “The airline is getting leaner – almost 7,000 employees will retire over the next five years. It has about 24,000 employees now. This includes staff at its ground handling and engineering services businesses, which have been hived off into separate companies. The hive-off of Air India Air Traffic Services Ltd, its ground handling business, and Air India Engineering Services Ltd will cut costs by Rs 1,000 crore a year. This has also led to a fall in the number of employees per aircraft, a measure of operational efficiency, to 100 from about 220 previously, which was nearly double the number at some local rivals.” http://businesstoday.intoday.in/story/air-india-recent-performance-offers-hope-of-a-comeback/1/196871.html
As we know, most of the major *A carriers do have separate subsidiaries for ground handling and engineering services.