Since the advent of deregulation in the Indian airline sector,
aviation companies have been plagued by a lack of consistent
profitability due to an inhospitable operating environment. Now the
industry is in dire straits as a result of excessive competition,
government interference, inadequate infrastructure, poor
management, and rising fuel prices.
[caption id="attachment_72023" align="alignright" width="300"
caption="Hopes that the Dreamliner will bring profitability to Air
India is mostly wishful thinking"]
[/caption]
Monday trading in Mumbai saw airlines drop significantly as
fears mounted in the sector. The previous week, state-owned
behemoth Air India/Indian Airlines announced to Parliament that the
country's flag carrier
would continue to post losses
thanks to an unprofitable business model. According to the company,
Air India could only meet its operating costs on less than 10% of
its flights and that 9 of the company's 184 services couldn't even
meet their fuel costs.
Excessive government interference
is a principal factor in Air India's performance. However, the
government's tentacles are not confined to Air India in the Indian
airline sector; all carriers in the industry have suffered due to
excessive bureaucracy.
Two new-ish private carriers, Kingfisher and SpiceJet,
desperately need additional funding to
stay afloat
. Courting foreign entities for investment and
a liquidity injection
is seen as one of the few feasible solutions to ensure these
companies remain airborne. Unfortunately the Indian government
remains resolute in preventing foreign carriers from investing in
an Indian airline. Because of the government's decision to again
refuse this approach over the weekend, both carriers were down more
than 5% in Mumbai trading.
To a certain degree, you can view the Indian airline sector as a
microcosm for the Indian economy (
INDY
,
quote
). Excessive bureaucracy that stifles organic competition will
continue to limit the economy's potential until such structural
deficiencies are remedied. If the government continues to play
favorites to pet projects -- in this case, Air India -- the economy
will be unable to reach its full potential. Until the country
can upgrade its infrastructure, its companies will be at a distinct
disadvantage to its peers in the emerging world. And finally,
although largely out of the government's control, a continued rise
in fuel prices will be detrimental to the fiscal health of the
Indian economy going forward.
