Go First filing for bankruptcy raises questions about ‘open skies’ policy

The government has constantly tweaked policy to favour private entrants in the airlines sector.

Passengers at a ticketing office of Go First airlines at the Birsa Munda Airport in Ranchi on May 4. The airline had cancelled flights for three days starting May 3, a day after filing for bankruptcy. | Photo Credit: PTI

The decision of the owners of Go First airline (formerly Go Air) to abruptly file for bankruptcy marks one more episode in the sordid saga of the history of civil aviation in the era of liberalisation. While the airline says it was incapacitated by the problematic Pratt & Whitney engines in its crafts, its journey to bankruptcy is in line with that of many predecessors.

The airline has been recording losses for many years and stayed in operation by accumulating debt. According to its bankruptcy filing, its debt is around $800 million, a substantial part of this from public sector banks. The faulty engines may have been just the tipping point.

Since private airlines began commercial passenger and freight services, one count indicates that more than two dozen of them failed, some without even starting operations.

The list includes significant failures such as Air Deccan, Jet Airways, Kingfisher, Modiluft, NEPC, Paramount, and Sahara. What is remarkable is not just that there have been so many failures, but that there have been so many private entrants.

The entry (and exit) of so many private players was at first seen as a vindication of the argument that the government’s monopoly in national and international airline operations prior to liberalisation had stifled competition, the consequences of which were high prices and low-quality service.

The fact that public ownership and the consequent absence of a single-minded focus on profit, not to mention the mandate to ensure regional balance, had ensured national connectivity through the introduction of flights even along high-cost and low-revenue routes was ignored. As was the fact that in the first decades after Independence not many private players would have been willing to enter this area, making public airlines unavoidable if a national airline was required.

Highlights

• Go First airline (formerly Go Air) filing for bankruptcy marks one more episode in the sordid saga of the history of civil aviation in the era of liberalisation.
• More than two dozen private companies have failed, some without starting planned operations.
• The number of airlines is too large for the market to bear despite the government relaxing aviation policy and the easy availability of loans.

Costs of privatisation

Private entry-based competition had its costs. Prices were slashed to attract traffic and costs were cut to earn positive margins or reduce losses. Yet, it was difficult for most airlines to record a profit. Given the volatility in fuel prices and costs, the losses were large at times. When accumulated losses were too high to sustain, bankruptcy and liquidation followed.

At different points in time, advocates of liberalisation and private entry argued that the industry would experience a shake-out, leaving a small number of players, each earning a respectable but not oversized profit. But, despite periodic failures, mergers or takeovers, the number of airlines always remained too high for the market to bear. Yet, new firms or investors constantly kept entering the industry.

A number of factors favoured this irrational attraction to invest in an industry where company mortality rates were high. Sunk costs for entry were kept down by the possibility of leasing (as opposed to buying) expensive aircraft in a financialised world. The government’s policy was designed and constantly tweaked to favour private entrants. Regulatory forbearance meant that costs could be kept down even at the expense of service quality and safety. And, credit from the public banking system seemed easy to extract.

In the event, every new operator was betting on getting a foothold in a competitive market they perceived was strong enough to deliver profits. The strategy seemed to be based on the idea that it was normal to bleed before stabilising and turning successful. But, with competition exerting downward pressure on prices, and some costs such as that for aviation fuel going increasingly out of control, failure, even of one-time ‘successes’ such as Deccan Air and Jet, became the norm.

This trajectory could not have happened but for government support that in various ways kept unviable firms in the market. Costs such as the pricing of aviation fuel or the tariffs imposed on them were kept down. Regulation was slack and helped cut costs. The public banking system was under constant pressure to lend to these enterprises. This environment gave rise to deviant behaviour on the part of profit-hungry businessmen. Accounts were manipulated, payments delayed, customers short-changed, and bank money diverted to build personal wealth.

Kingfisher may be an extreme case of controversial failure. But around the time Go First declared bankruptcy, the Central Bureau of Investigation (CBI) conducted searches at the residences and offices of Jet Airways founder Naresh Goyal, his wife Anita, and former airline director Gaurang Ananda Shetty, allegedly to investigate bank fraud and diversion of funds to the tune of Rs.538 crore. Private enrichment may have been a possibility even when the airlines failed.

Open markets and failure

Two factors played a role here. One was the government’s desire to make liberalisation in the civil aviation space a success. The depth of that desire is visible in the lengths to which the government went and the costs it was willing to bear to privatise Air India. For the industry as a whole, the government strove to keep the market open, airline travel cheap, and multiple operators in place.

This was in keeping with the open skies policy adopted by successive liberalising governments keen to embrace ‘competition’. However, as experience indicates, ‘competitive markets’ often deliver failure. Wrong decisions leading to excess capacities, price wars that reduce margins, and just plain bad management deliver losses and bankruptcy. Faced with the evidence but unwilling to backtrack, the government has tried unsuccessfully to preempt such outcomes.

The second factor influencing the government’s stance was the realisation that closure of an airline, especially the ones with a large footprint, involved significant collateral damage. Passengers attuned to accessing cheap airline travel options saw these dry up, even if temporarily, on certain routes. Pilots and staff did not receive salaries in time and were due large sums in arrears when closure occurred. Banks that had lent large sums were left tending huge non-performing loans. All of these challenged the legitimacy of liberalisation and privatisation. Failure had to be minimised, so there was no case made for rethinking liberalisation.

But reality poses a challenge. More failures cannot be ruled out. Yet, bets are on large profits from the industry. After its takeover of Air India, the Tata group has decided to place a huge order for 470 aircraft from Airbus and Boeing. Recouping that investment is not going to be easy. The conglomerate is clearly betting not just on the expansion of the air travel market in India, but on stomping out the competition. It is hoping to successfully traverse a path that others have tried and failed.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.