After all, SIA is already involved in several aviation-related projects in India and the new carrier would provide India with a well financed, high quality airline, create hundreds of local jobs, and boost training of Indian nationals. Officially, the venture was victim to a government-imposed slow-down on foreign involvement in Indian startups - there is a 40 per cent ceiling on offshore investment - until desperately needed infrastructure improvements are made, including airport modernisation.
According to Prem Shankar Jha, noted economist and former prime ministerial adviser, there is another reason. 'It is not sufficient simply to come into India with an Indian partner. If you want a project to succeed, don't come in with an honest broker. . . I can name at least 20 people who would be able to get SIA into India with no problem at all,' he asserts.
Prem is stating publicly what everyone in India knows; winning approval for almost any venture depends on government connections and lobbying clout and, often, political donations.
The SIA/Tata venture stumbled in the face of lobbying from private airlines fearing the quality and impact of a carrier managed by Singaporeans at a time when they are struggling to find consistent profitability. Leading the charge, according to informed insiders, was Jet Airways. Ironically, Jet itself is no stranger to foreign partners, as it is owned by a non-resident Indian and Middle East carriers Gulf Air and Kuwait Airways.
Intrigue controls the destiny of Indian industry, including aviation. At least one private operator, East West Airlines, has even been accused of links with organised crime, a charge management strenuously refutes (although its most senior official was murdered gangland-style last year, shot dead in his limousine).
In the swamp that is Indian politics it is little wonder that the future of the airline industry is uncertain, with airlines struggling to maintain profitability in an often poorly policed regulatory climate. Coupled with high operating costs and an infrastructure unable to cope with the demands of expansion hungry carriers, this means the odds on success for any of them are finely balanced.
With national elections scheduled for April, finding solutions - and implementing them - may be one of the toughest issues confronting a new government and its transport ministry.
This is a market with potential growth rates paralleled only by those of China. So what went wrong and what is required to get liberalisation back on track? In theory, the future should be rosy. Domestic airline traffic increased from 7.5 million in 1990 to about 12 million last year, with forecasts suggesting growth will continue at 10-15 per cent annually.
In practice, ad hoc decision-making - often spurred by behind-the-scenes influence peddling - has led to uncontrolled expansion, transforming a monopoly market into a chaotic free-for-all almost overnight. There are now seven scheduled private airlines, 18 non-scheduled operators and 27 others waiting in the wings proposing to enter the fray. Along with state-owned Indian Airlines, they offer 50,000 seats a day with average passenger numbers of 36,300.
The competition has brought benefits to consumers, who are getting greater choice, improved dependability and better on-board service. Yet ironically, while IA fights off private rivals it also works with them on air fares in an apparent price-setting cartel. Average ticket prices rose over 40 per cent between 1993 and 1995 and more fare hikes are in the offing. 'The sad thing is that instead of driving price efficiency into the market place with low cost operations, these private airlines have got together with IA to raise prices year upon year,' says one local analyst.
The playing field is distinctly un-level, and often it is Indian Airlines which suffers at the hands of its government owners. For example, IA is forced to keep fares 17 per cent below the national average on some secondary routes, while private carriers on the same sectors are allowed to charge rates commensurate with operating costs.
Indian Airlines lost US$226 million between 1991 and 1994, but minister for civil aviation and tourism Ghulam Nabi Azad says the airline made a 'dramatic' turnaround during 1995, with an operating profit of $7.2 million in the first seven months of the current financial year, against a $23.1 million loss in the corresponding period in 1994.
International flag carrier Air-India is beset by financial woes, poor service standards and an ageing fleet badly needing replacement. Profits declined from $64 million to $13 million in the year to 31 March 1995 due to reductions in yields; increases in operating costs especially for aircraft leasing; outside repairs of the ageing fleet; and increased depreciation and interest payments for acquiring new aircraft.
Both need capital but the sums required are large and government is committed to a policy of not bailing out public sector industry.
The private carriers are also struggling in the face of high operating costs. As recently as February the government threatened to ground five airlines - Modiluft, Jagson Airways, Skyline NEPC (formerly Damania), NEPC Airways and East West - over failure to pay $7.3 million in air travel tax collected from domestic passengers. They handed over $5.6 million to stay in the air - Modiluft and Jagson paid only part of the bill, seeking more time to settle the balance. That is evidence of how finely balanced the new operators' cash positions are, though most claim to be in profit.
Damania lost $20 million in two years before last year being taken over by Madras-based NEPC, whose wide-ranging interests include wind turbines, textiles and paper, as well as a small feeder airline.
East West declares modest profits but frequently fails to pay salary, fuel and user charges. Aircraft have been impounded and lessors have threatened to foreclose.
Modiluft reported a $2 million profit in 1994/95 though officials at Germany's Lufthansa, which provides management and technical assistance, confirm privately the airline is bleeding. Lufthansa has an option to take a 40 per cent equity stake in Modiluft but, significantly, has held back. Modiluft has become the target of a hostile takeover bid by NEPC.
Jet Airways, probably the most successful of the major private airlines - it targets the corporate market - reported income of $2.2 million last year but also finds consistency difficult.
They all blame punitive high operating expenses, particularly aviation fuel, which costs $1.60 a litre compared with the international price of 60-70 cents; a local surcharge was imposed at the time of the Gulf war and has never been lifted. Fuel accounts for 30 per cent of their costs. Airport charges are also high as the Airports Authority of India endeavours to raise money for infrastructure improvements. The value of the rupee has been shrinking, pushing up US dollar lease costs, a trend some believe may be the straw that breaks the camel's back.
There are plenty of signs the strain is telling. New Delhi recently curbed revamped growth plans of three operators - Sahara India, Skyline NEPC and Jet Airways - because they failed to use earlier approvals, including those to import aircraft. Jagson downgraded plans to bring in two Dornier 328s, taking secondhand HS.748s instead - a clear sign of a tight budget.
Clearly, growth is likely to be restrained by lack of infrastructure, government limits on new aircraft imports, and lack of enough revenues to maintain expansion plans.
There is also a severe shortage of pilots, likely to last up to five years. The private airlines entered the market at a low cost by leasing old B737s, then plundered Indian Airlines for pilots and engineers, offering salaries five times larger than they were getting. The impact on IA was dramatic. It lost more than 100 captains and as many engineers in two years, and aircraft utilisation dropped by almost 30 per cent. At one stage six out of IA's 10 Airbus A300s were unserviceable and 12 of 19 B737s were not flying. A third of the Airbus A320 fleet also sat on the ground.
Insiders say the government didn't fully appreciate the implications of allowing so much jet capacity onto trunk routes until it saw IA lose market share; its trunk route business fell from 100 per cent of the market in 1990 to 75 per cent by late 1993 and is now believed to be down to 50 per cent.
Indeed, most of the problems stem from the way in which deregulation was introduced. A study by former Air-India board member Harish Malik and A T Kearney management consultant Pravir Malik puts it bluntly: 'There is no national aviation policy,' it says, adding that deregulation has put undue financial pressure on private operators, making it difficult for them to attain economies of scale and lower unit operating costs. But it has also created an atmosphere in which IA, burdened by bureaucratic management, high costs and bloated staff numbers, found it impossible to compete.
They bemoan the lack of preparation for deregulation. 'The process of liberalisation of civil aviation was launched as part of the overall policy of economic liberalisation without specific attention to the special characteristics of the air transport industry.' That led to 'confusion and ad hocism', they say, worsened by government anxiety to give protection to national carriers. Yet protection was one thing the government operators didn't get. Caught between the demands of private interests and the need to protect its own carriers IA and Air-India, the government failed to satisfy either side. Worse, say Indian-based analysts, New Delhi eschewed the one step which might set its own airlines back on the road to recovery; merger and privatisation.
'The first imperative is that the government have the courage to float off Indian Airlines and Air-India and privatise them,' says Cyrus J Guzder, a former director of Air-India and now chairman of Bombay-based Airfreight Ltd. Tipped as a future transport minister, Guzder argues this would give the new management flexibility, allowing them to work their way slowly out of problems.
In Air-India's case, he says, privatisation should have taken place 10 years ago. 'If the government allows AI to float off they would be doing it a great favour . . . The problem is, government doesn't want to let go . . . and very often senior managers of AI itself are reluctant to go for privatisation because it makes their future higher risk,' he says.
Not everyone agrees the sell-off should be speedy. Russi Mody, chairman of both government airlines, concedes there is no future for either carrier unless they merge but is against a hurried union, expecting they will become 'Airways India' in a 'couple of years'.
In the meantime the common board of the two airlines has set up a task force to work out synergies which will allow them to codeshare and pool maintenance and overhaul infrastructure to optimise resources and cut costs. Mody says this is an alliance, not a merger. His opponents claim it is a delaying tactic; an earlier committee set up to consider merger came to the conclusion it would create more problems than it would solve, including industrial unrest.
IA is setting up its own low-cost domestic subsidiary, Allied Services, in an attempt to fight the opposition on equal terms and win back market share. Launched in March with four B737s leased from its parent, Allied is targeting a turnover of $50 million for the first year, including a modest profit. It hopes to remain in the black by keeping overheads to the bare minimum, although it has recruited 30 pilots from IA at pay scales on a par with private competition.
IA itself has negotiated a new pay deal with pilots, doubling their salary and clearing the way for recruitment of foreign cockpit crew to bridge the shortfall caused by private airline poaching.
All this may be too little too late. Guzder is now convinced that only tough government action will rectify the inequalities in the system. He believes a capacity limit of 50,000 seats should be imposed for two years to allow stabilisation, and he advocates strong air fare controls. 'I would be very savage. I would encourage consumer groups to set up tariff review commissions and hold public hearings and get these guys to present their figures and make them justify cost increases in an open market.' All agree there is an urgent need to remove - or at least reduce - the fuel surcharge and lower charges and taxes to ease the cost pressures.
Guzder believes the present difficulties will lead to a shakeout in the industry with mergers between private carriers. This is beginning to happen already. Having taken over Damania, NEPC then launched its hostile takeover bid for Modiluft in an attempt to create the largest independent airline.
As the current independents jostle for position, SIA has not given up hope of obtaining approval for its airline venture with Tata. SIA insists that projected market growth means that there will be plenty of room for its proposed airline alongside existing competitors. Once the election is over, the partners will be lobbying hard for a decision in their favour.
The study by Harish and Pravir Malik suggests that airlines will continue to operate in crisis if government fails to formulate a positive regulatory framework.
They say decisions must be made to put airlines on a proper footing; among them the privatisation of Air-India and Indian Airlines and the setting up of an independent regulatory aviation authority to replace the ad hoc system currently in place.
'Will there be expeditious, harmonious development of infrastructure? Will the private sector rise to the occasion or will it demand protective guarantees: a shift from one form of monopoly to another?' they ask.
These issues will have to be addressed successfully if airlines are to find a pot of gold at the end of the Indian aviation rainbow.
Source: Airline Business
