Air India disinvestment: How many airlines can the Indian market support?

The talk of privatising Air India brings up an old question about India’s airline business: how many airlines can the Indian market support? Or, more accurately, how many airlines can a route support?

The same question can be asked of the global aviation business also. That is why we have bilateral agreements in aviation to limit market access.

Few people realise it but the fact is that, in economic terms, an airline is exactly like a vegetable seller because both sell perishables. In fact, if anything, an airline is worse off. Vegetables can keep for several days. But the value of an empty seat drops to zero the moment the plane takes off.

Another feature of the airline business is that average decadal return on investment, over the last 50 years for all airlines amounts to no more than about 1.5 per cent. Financially, it is a mug’s game. This is exactly what happens to vegetable sellers also – very hard work and very low returns.

This peculiar feature is what makes market structure and is critically important for both the vegetable seller and the airline industry. Both fall somewhere between a perfectly competitive market where the seller cannot influence the price and a monopoly, where they can. The most profitable markets are the ones where there are no more than 3-4 sellers. 

Indian folly

India, in contrast, has far too many airlines competing on too many routes. The Indian airline industry, after having been a monopoly from 1953 to 1993, is now closer to the perfectly competitive model. Its main feature is non-price competition which as Apple has discovered has its limits.

From a purely economics point of view for any capital-intensive industry the guiding principle has to be that, it is ruinous to have any market structure other than an oligopoly, with five players at best.

This means there is a social choice to be made in order to arrive at a trade-off between consumer interests and industry interests wherein competition is deliberately limited to a few players.

Consumer activists will blow a fuse at this suggestion. But they need to be rational, not emotional.

Air India’s airs

In today’s world, just as anyone can start selling vegetables, anyone can also start an airline: even, as we have seen, a poultry farmer or a liquor merchant. But can they run it? It seems not.

The reason is that while you can get aircraft, crew, management and working capital fairly easily, you can’t get market access quite so easily. And what use are these things if you have too few places to fly to?

This is Air India’s major strength: anyone who buys it will get its routes, both domestic and international. They are worth several billion dollars if exploited properly. The industry knows this.

That is why Air India should not be sold for less than 3 lakh crore at the very least. And that is also why we are seeing the constant harping Air India’s accumulated debt. Be assured, this debt is just about a tenth of the value of the market access that Air India has. 

And then there are the land assets as well. If these are added, the actual cost to the buyer will come down further.

Many will argue that given Air India’s costs, this is too much. But this is not true because its costs will come down once it adopts the right business and pricing strategies.

However, this can happen properly only if the government doesn’t own any stock at all. There is simply no point in it. 

If all it wants is freebies for politicians, a simple request from the Speaker, asking for say 10,000 tickets a year should do the trick. The allotment of these tickets can be left to him and/or her.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel