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 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.