Airline Industry

MIAMI UNIVERSITY The Graduate School

Certificate for Approving the Dissertation

We hereby approve the Dissertation of Arijit Mazumdar

Candidate for the Degree: Doctor of Philosophy

─────────────────────── Director (Dr. John M. Rothgeb, Jr.)

─────────────────────── Reader (Dr. Venelin I. Ganev)

─────────────────────── Reader (Dr. Abdoulaye Saine)

─────────────────────── Graduate School Representative (Dr. Daniel K. Gladish)

ABSTRACT

DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENT’S POLICY, RATIONALE AND STRATEGY

By Arijit Mazumdar

Three decades after it nationalized its airline industry, India began to ease restrictions in 1986. This study examines the factors that motivated the government to deregulate the industry. It documents the changes in the regulatory system and analyzes the rationale and strategy behind the policies adopted by the government. Based on results from interviews conducted with government officials in India’s civil aviation ministry, it is concluded that although the factors that motivated the government to deregulate the airline industry include the desire to promote economic development, improve air services and the international trend towards liberalized airline competition, the government’s determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics.

DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENT’S POLICY, RATIONALE AND STRATEGY A DISSERTATION

Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science

by

Arijit Mazumdar Miami University Oxford, Ohio 2008

Dissertation Director: Dr. John M. Rothgeb, Jr.

TABLE OF CONTENTS List of Tables……………………………………………………………………………..iv List of Figures……………………………………………………………………………..v List of Appendices………………………………………………………………………..vi List of Abbreviations…………………………………………………………………….vii Glossary of Terms………………………………………………………………………viii Dedication………………………………………………………………………………..xi Acknowledgements………………………………………………………………………xii

Chapter One – Introduction……………………………………………………………….1 Research Objectives……………………………………………………………….1 Deregulation of Air Transport Services in India…………………………………..2 Research Question………………………………………………………………...4 Literature Review………………………………………………………………….5 Hypothesis………………………………………………………………………..13 Research Methodology…………………………………………………………..15 Organization of Study……………………………………………………………19

Chapter Two – Evolution of the Airline Industry in India……………………………….21 Introduction………………………………………………………………………21 Historical Landmarks in Indian Airline Industry………………………………...22 Regulation of the Airline Industry in India………………………………………25 Factors responsible for Deregulation of the Airline Industry in India…………...38 Deregulation of the Airline Industry in India……………………………………49 Problems associated with Deregulation of the Airline Industry in India………...71 Summary and Conclusion………………………………………………………..73

Chapter Three – Deregulation of the Airline Industry in India: Conditioning factors…..75 Introduction………………………………………………………………………75 Established Practices and Procedures in the International Airline Industry……..75

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National Security and Safety…………………………………………………….98 Political Culture of India………………………………………………………..103 Summary and Conclusion………………………………………………………109

Chapter Four – Government Rationale and Strategy for Deregulation of the Airline Industry in India……………………………………………………….111 Introduction……………………………………………………………………..111 Organization of the Airline Industry in India…………………………………..111 Interview Results……………………………………………………………….116 Summary and Conclusion………………………………………………………130

Chapter Five – Conclusion……………………………………………………………..132 Deregulation of the Airline Industry in India…………………………………..132 India’s Experiences: Some Observations and Recommendations……………...140

Appendix A……………………………………………………………………………..147 Appendix B……………………………………………………………………………..151

References….…………………………………………………………………………...152

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LIST OF TABLES Table 1: Five-Year Average Profits of Air-India and Indian-Airlines…………………..31 Table 2: Declining returns for Indian Airlines 1988-89 to 1993-94……………………..32 Table 3: Share of India’s Carriers in India’s International Traffic………………………34 Table 4: Growth of Capacity at Air India, 1980-1991…………………………………...36 Table 5: Air India’s Rankings among IATA Airlines…………………………………...37 Table 6: Growth in India’s air traffic (in millions), 2007-2017………………………….46 Table 7: Market share of Airlines offering Domestic Scheduled Air Services in India, 2006……………………………………………………………………………..57 Table 8: Number of Passengers traveling (in millions) during 2006, First Quarter-Fourth Quarter………………………………………………………………………….58 Table 9: Profits for Indian Airlines, 1995-96 to 1999-2000……………………………..61 Table 10: Financial Performance of Air India, 1995-96 to 2001-02…………………….63 Table 11: Air services to and from key markets (2005-2006)…………………………...80 Table 12: Air Services Agreement between India and France, 23rd February 2005……..82 Table 13: Air Services Agreement between US and India, 14th April 2005……………..83

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LIST OF FIGURES Figure 1: Growth in India’s air traffic (in millions), 1996-2007………………………...45 Figure 2: Bilateral Air Services Agreement and India…………………………………..79

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LIST OF APPENDICES Appendix A: Questions for Deregulation of Airline Industry in India Survey…………147 Appendix B: Organization of the Ministry of Civil Aviation, Government of India…..151

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LIST OF ABBREVIATIONS AAI

Airports Authority of India

ASA

Air Services Agreement

ASK

Available Seat-Kilometer

DGCA

Directorate General of Civil Aviation

EU

European Union

FDI

Foreign Direct Investment

IATA

International Air Transport Association

ICAO

International Civil Aviation Organization

MOU

Memorandum of Understanding

NRI

Non-Resident Indian

RPK

Revenue Passenger-Kilometer

UAE

United Arab Emirates

UK

United Kingdom

US

United States

WTTC

World Travel and Tourism Council

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GLOSSARY OF TERMS Air Service Agreement

An agreement with formal treaty status between governments regulating the conduct of trade in international air services. It consists of a series of articles (or provisions).

Alliance

An agreement between airlines to cooperate in the provision or operation of some of their services on a route, or on a regional or global basis.

Available Seat-Kilometers

The total number of seats offered multiplied by the distance flown, used as a measure of air transport passenger capacity.

Cabotage

Provision of commercial domestic air services within a country.

Codesharing

The assignment of one airline’s designator code (for example, ‘AI’ for Air India) to a flight operated by another airline.

Freedoms of the air

Types of international aviation rights established under ASAs.

Hub

An airport that an airline uses as its base of operations and a transfer point for passengers.

Interlining

commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines.

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Intermediate rights

The right of a carrier from one country to fly to another country via a third country.

Load factor

The number of passengers carried as a percentage of the number of seats available.

Memorandum of Understanding

An agreement between two parties.

Non-scheduled airline

Any air transport enterprise only offering air transport services to the public that are not performed according to a regular timetable.

Open Skies agreement

An agreement to remove restrictions on the ability of airlines to operate services between two countries.

Revenue Passenger-Kilometers

The number of paying passengers on an aircraft multiplied by the number of kilometers flown, used as a measure of air passenger travel services.

Route

An air service between two points of cities.

Scheduled airline

Any airline operating regular air services according to a published timetable.

Scheduled services

Flights listed in a published timetable and performed for remuneration.

Substantial ownership

All or majority ownership of an airline by

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citizens in country of registration.

Tariffs

The prices to be paid for the carriage of passengers, baggage, cargo (excluding mail) on scheduled air services.

Yield

Airline revenue per unit traffic. Passenger yield is airline revenue per passenger kilometer.

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DEDICATION

To my parents and Suma

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ACKNOWLEDGEMENTS First of all, I want to thank my advisor, Dr. John M. Rothgeb, Jr. His help, guidance, and patience were indispensable when writing this dissertation. I would also like to extend my sincere appreciation to my dissertation committee members, Dr. Venelin I. Ganev, Dr. Abdoulaye Saine, and Dr. Daniel K. Gladish.

Next, I would like to express my gratitude to the Department of Political Science, Miami University, Ohio, for the opportunity to complete my doctoral studies here. In addition, I want to thank the Graduate School of Miami University, Oxford, Ohio, for awarding me a dissertation scholarship for the Spring Semester 2008, and a dissertation support award, which allowed me to carry out this project.

For their willingness to be interviewed, I gratefully acknowledge government officials in the Ministry of Civil Aviation, Government of India, who will go unmentioned here. They clarified many matters for me concerning civil aviation in India during our discussions.

I would like to thank my parents for their love and support throughout the years and for always having faith in my abilities.

My deepest gratitude is reserved for Suma who has been a source of love, patience, kindness and inspiration to me. Without her constant support and encouragement, this work would not have been possible.

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CHAPTER ONE Introduction Research Objectives For three decades until the mid-1980s, India heavily regulated its airline industry. It restricted foreign and private domestic commercial airlines from operating scheduled services within the country, while the state-owned domestic air carrier Indian Airlines enjoyed a monopoly. This was in keeping with the country’s socialist-oriented approach towards economic development, which restricted private sector participation, foreign trade, and foreign direct investment. However, since the early-1990s, as part of a broader economic liberalization agenda, India has been in the process of opening up its civil aviation sector, including the airline industry, to private domestic and foreign players. The purpose of this study was to examine the factors that motivated the government to deregulate the airline industry. This study is significant because deregulation of the airline industry in India is intimately associated with issues like the changing structure of the economy (transition from a planned economy to a liberalized economy), the role of foreign players (to what extent should foreign players be allowed to participate in the airline industry) and ownership issues (who will have ownership of the state-owned air carriers, the airports, the private domestic carriers, etc.). The issues associated with the deregulation of the airline industry are political in nature not only because they affect the economic growth and development of India, but also because such policy changes create an arena where different interests, having different priorities, compete with each other to maximize their relative gains. Unlike the case in Eastern Europe, where countries not only transitioned from a socialist economy to a free-market economy but also transitioned from communism to democracy, in India the liberalization of the economy was not associated with a concurrent change in the political system. This makes India a unique politicoeconomic case. The study of the deregulation of the airline industry in India also represents an excellent case for investigating the expanding role of markets, private capital, reform of 1

state-owned enterprises, bureaucratic reorganization, decentralization, and globalization. This study provides valuable insights into factors that are critical in attracting foreign investment for a developing country that is liberalizing its economy. Finally, this study is significant because little detailed academic work has been done on civil aviation in India. The study of deregulation of air services in India has received virtually no attention in the academic field. This study addresses this gap and makes a modest contribution in this area because it considers civil aviation, particularly the deregulation of the airline industry, an important element in the liberalization of the Indian economy. This chapter opens with a brief discussion on the deregulation of the airline industry in India and situates the significance of the research within the context of existing scholarship on deregulation and privatization of economies around the world. The literature review explores one of the most controversial subjects in international political economy – deregulation and privatization of economies and the role and impact of private domestic and foreign players in this process. After offering a hypothesis to the research question, a description of the research methodology and data gathering techniques employed for this study is presented. The chapter concludes with the plan of organization for the study.

Deregulation of the Airline Industry in India Less than two decades ago, there were only two airlines offering scheduled air services in India: Indian Airlines, for domestic travel, and Air India, for international travel. Independent India’s first elected government established the two airlines in 1953 by acquiring and consolidating several private commercial carriers offering scheduled air services. Private commercial airlines offering scheduled services would not emerge again until 1994, three years after India’s eleventh elected government eased barriers to private sector participation, foreign trade, and foreign direct investment in the country’s economy. The Air Corporations Act of India, 1953, which had established Indian Airlines’ monopoly in domestic scheduled services, was repealed in 1994. This allowed private domestic commercial airlines to operate scheduled services within the country.1 Some of the other significant developments that were undertaken during that time by the 1

See Air Corporations Act, 1953. Directorate General of Civil Aviation, 2007a.

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government included inviting private participation in the development of airport infrastructure and modernization of the air traffic system. Part of the reason for opening up the airline industry was the increased demand for domestic air travel. This trend has continued till the present. In recent years, air traffic to and from India has been among the fastest growing in the world. For example, the number of passengers traveling by air within the country has increased by 46.5 % during May 2006 (5.85 million) as compared to the same period in the previous year (4 million). Similarly, the international passenger traffic handled by Indian airports during May 2006 has registered a growth of 15.7 % to reach 1.99 million passengers, up from 1.72 million during the same period in the previous year (Phadnis, 2006). This rapid growth of air traffic led to increased consumer demand and expectations. Keeping pace with such demand required India to modernize and develop its civil aviation sector through measures that included liberalizing air transport services and attracting private domestic and foreign investment. Since the early-1990s, when the government began deregulating the airline industry with the passage of the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994, several private domestic commercial airlines have been established.2 Today it is hard to keep track of India’s domestic air transport market with new airlines entering the field every year. These new players have expanded passenger choices regarding frequency of flights, routes, destinations, and fares. In 2003, Air Deccan, India’s first low-cost carrier started operating, signaling a new phase in India’s evolving air transport sector. In addition, international air travel to and from India also witnessed major growth. Since the early-1950s, in an attempt to regulate the flow of traffic to and from the country, India has signed over 100 bilateral air services agreements (Ministry of Civil Aviation, Government of India, 2006). Such agreements specified fixed number of flights to fixed number of destinations on the basis of reciprocation (splitting international passenger traffic 50-50 between Indian and foreign carriers). However, such agreements have failed to keep pace with the rising international air traffic to and from the country.

2

See Air Corporations (Transfer of Undertakings and Repeal) Act, 1994. Directorate General of Civil Aviation, 2007b

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For example, travel between India and the United States has increased by 80.1% to 1.18 million in 2005, up from 655,000 passengers in 2002 (Office of Travel and Tourism Industries, US Department of Commerce, 2006a; 2006b). The number of passengers flying between the two countries increased by 25.8% between 2004 and 2005 alone, and it was anticipated that air traffic between the two countries would continue to rise (Office of Travel and Tourism Industries, US Department of Commerce, 2006a; 2006b). In response to this, the government gave permission to a few private domestic commercial airlines to operate services to other countries and also re-negotiated certain existing bilateral air services agreements and entered into new bilateral air services agreements with other countries, thereby enhancing capacity on international routes. The government had also allowed new ‘ports of call’ for foreign airlines, particularly US commercial airlines, permitting them to expand services to and from India through the ‘open skies agreement’. This agreement, signed between India and the US in April, 2005, removed previous restrictions on frequency, capacity, size of aircraft, destinations, and fares. Finally, the government also eased regulations for airport construction and modernization by allowing public-private partnership in construction and operation. The privatization of two of the largest airports in the country, at Delhi and Mumbai, are a case in point. The government also encouraged private participation in building new airports at other major cities, like Hyderabad and Bangalore, and in aircraft manufacturing and ground handling services (Ministry of Civil Aviation, Government of India, 2008e).

Research Question The government’s policies regarding the airline industry are aimed at enhancing the role of the private sector. The government has attempted to formulate favorable policies to attract not only domestic, but also foreign players to the airline industry. This study examined the factors that motivated the government to deregulate the industry. Specifically, it attempted to address the following questions:

(1) What factors motivated the government to deregulate the Indian airline industry?

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(2) What factors influenced the government in its determination of the process and pace of deregulation of the Indian airline industry?

Literature Review The scholarly literature informing economic liberalization and reform is vast and rich. Much of the literature focuses on privatization and deregulation of economies around the world. Most of the recent work in this field involves studies of privatization and deregulation programs in countries comprising the former Soviet Union and Eastern Europe, where economic transition has been associated with political transition. However, there are several studies done on privatization and deregulation programs in other countries (which have not seen political transition) as well. This literature review therefore concentrates on privatization and deregulation programs in both the transition countries as well as the non-transition countries. The transition countries are particularly significant since they were among the last major group of countries to adopt these programs. These programs were put in place by the newly-elected governments in the aftermath of the collapse of the communist regimes in these countries as part of their transition from a socialist economy to a more marketoriented economy. The scholarly literature in this field concentrates on how privatization and deregulation allows states to raise revenue, promote competition, promote economic efficiency, improve economic performance of state-owned enterprises, reduce government interference in the economy, and widen ownership. It is difficult to illuminate each and every one of the relevant texts pertaining to this field. The literature reviewed below has been selected bearing in mind the nature and scope of this study. This literature review classifies some of the empirical studies done on privatization and deregulation in this region into two groups. First, we examine studies conducted on privatization and deregulation programs in Central and Eastern Europe. Next, we look at the study of privatization and deregulation programs in Russia and the other former Soviet republics. Finally, we look at studies of deregulation and privatization in non-transition countries.

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What is important to keep in mind in the case of Central and Eastern Europe and Russia is that privatization in these countries took place at the same time when there was a broader shift from socialist to market economy. In addition, this was also the time when these countries were making the transition from communist regimes to liberal democratic regimes. These conditions posed unique challenges for governments intending to privatize state-owned assets. Brada (1996) has classified the methods of privatization into four categories: (1) privatization through restitution (land or other property is returned to its original owners; (2) privatization through the sale of state property by: (a) direct sales, and (b) offering shares to the general public; (3) privatization through mass or voucher privatization, and (4) privatization from below (through startup of new private firms). In the aftermath of the collapse Communism, a number of firms have been privatized in Eastern Europe and the former Soviet republics through some or all of the ways outlined above. However, these programs met with mixed results in these regions. Take for example the distribution of vouchers by the state to the general public. The public could use these vouchers to buy shares in the enterprises and companies that were being privatized by the government. These kinds of programs led to massive divestment of state-owned assets. Over time, there was criticism of this kind of program in countries like Russia because it was seen as a means through which the elites increased their wealth by manipulating the process. An extensive survey of the empirical studies done on privatization in both transition and non-transition countries has been carried out by Megginson and Netter (2001). This section incorporates some of their findings that are most pertinent to this study. The studies done on Central and Eastern Europe considered here revolve around the question as to how privatization impacts firm-level operating performances. These studies employed diverse empirical methodologies and cover different time periods. Some studies found that private ownership is associated with better firm-level performance than continued state ownership. Claessens, Djankov, and Pohl (1997) examine the determinants of performance improvements for 706 Czech firms privatized during 1992-95. They found that privatized firms showed improved performance because of concentrated ownership. The more concentrated the ownership the greater the profits.

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In another study, Claessens and Djankov (1999) examined the relationship between ownership structure and performance (defined in terms of profitability and labor productivity) of 706 privatized Czech firms during the period of 1992-97 and found that concentrated ownership was positively associated with higher profitability and labor productivity. Similarly, Weiss and Nikitin (1998), in their analysis of effects of ownership by investment funds on the performance of 125 privatized Czech firms during 1993-95, found that ownership concentration and composition together affected the performance of privatized firms. Other studies found that foreign ownership was associated with better firm-level performance improvements than purely domestic ownership. Using a sample with 22,735 firm-years of data drawn from the privatization period in Slovenia during 1989-92, Smith, Cin, and Vodopivec (1997) found that increase in percentage points of foreign ownership was associated with a 3.9% increase in value added. In other cases, increase in percentage point for employee ownership was associated with a 1.4% increase in value added. Privatization studies in Central and Eastern Europe have found that firms controlled by non-employee investors were much more likely to restructure and were associated with better performance in the post-privatization period. Frydman, Gray, Hessel, and Rapaczynski (1999) found that privatization was successful only when the firm was controlled by outside owners (other than managers and employees). Privatization added 18% points to annual growth rate of firms sold directly to domestic financial firms and 12% points to firms sold to foreign buyers. In addition, privatization, which led to outside ownership, added 9% points to productivity growth rate (Frydman, Gray, Hessel, & Rapaczynski, 1999). With respect to post-privatization firm-level restructuring, studies have found that they were associated with significant improvement in firm performance. Pohl, Anderson, Claessens, and Djankov (1997) compared the extent of restructuring in over 6,300 private and state-owned firms in seven Eastern European countries during 1992-95. They found that privatization dramatically increased restructuring likelihood and successes. Other studies have supported these findings (Frydman, Gray, Hessel, & Rapaczynski, 1999). Firms that have been privatized for four years showed increased productivity three to five

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times more than similar state-owned enterprises. They also found that there was little difference in performance based on method of privatization. However, ownership and financing affected the restructuring process. There was also evidence that while performance improved for firms, especially smaller firms, in the immediate aftermath of privatization, over a period of time this performance declined (Lizal, Singer, & Svejnar, 2000). This was believed to be primarily due to increased competition as time went on. There is ambiguity regarding the role investment funds have to play in improving the performance of privatized Czech firms. Claessens and Djankov (1999) found that firms that were controlled by non-bank sponsored investment funds showed greater improvement in performance than those controlled by bank-sponsored funds. However, Weiss and Nikitin (1998) found that there was no direct association between ownership by investment funds and firm performance. Other studies have found that a new manager brought in to run a firm improved the latter’s performance. In studies on the effect of management turnover on changes in profitability and labor productivity of 706 privatized Czech firms over the period of 1993-97, Claessens and Djankov (1999) found that appointment of new managers was associated with significant improvements in profit margins and labor productivity. This was especially so if the managers are selected by private owners. Frydman, Hessel, and Rapaczynski (2000) also agreed with this finding and pointed out that greater incentives offered to managers resulted in more entrepreneurial behavior, which in turn improved profit margins and labor productivity. Finally, there have also been studies examining one of the most contentious issues associated with privatization – loss of jobs. The results of these studies suggested that the impact of privatization on employment was ambiguous. Employment fell for almost all firms in transition economies when privatization programs were put in place. Harper (2002) found that employment declined after the first wave of Czech privatization in 1992, but this was not the case after the second wave of privatization in the country during 1994. Frydman, Gray, Hessel, and Rapaczynski (1999) found that gains in productivity growth did not come at the expense of higher unemployment. The impact of privatization and deregulation in Russia and the other former Soviet republics was markedly different from the Central and Eastern European

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experience. The transition from socialism to capitalism proved to be more difficult in the former Soviet republics because the latter had been under communist rule the longest. The break-up of the Soviet Union proved traumatic for them not only because it resulted in political dissolution, but also because the Soviet Union was an economic system. There was substantial decline in output in the immediate aftermath of the collapse of the Soviet Union and little improvement in the subsequent years unlike the Central and Eastern European countries. In fact, after 1997, economic performance worsened in several of the former Soviet republics, including Russia. Studies done on privatization and deregulation programs on this region pointed out that ‘insider privatization’ had not worked in the former Soviet republics, especially Russia, and that concentrated managerial ownership structure was likely to hamper economic growth (Bornstein, 1994; Earle, 1998; Earle & Estrin, 2003; Black, Kraakman, & Tarassova, 2000). Russian reformers believed that the most effective method of rapid privatization during the initial mass privatization phase of 1992-93 was to give incumbent managers and employees controlling shares. However, this policy did not produce desired results in terms of improvements in performance levels. Much of the literature pointed to the problems associated with privatization in Russia. Black, Kraakman, and Tarassova (2000) demonstrated how state assets were transferred to the elites and oligarchs in a very non-transparent way, particularly through the voucher scheme, which gave rise to disenchantment among the general public regarding privatization. Nellis (1999) also pointed out that the Russian privatization program was less successful than the Central and Eastern European ones. This was primarily due to the weakness of federal government authority. Studies have found that mass privatization programs implemented in the early1990s were associated with improved firm performance (Barberis, Boycko, Schleifer, & Tsukanova, 1996; Earle, 1998; Earle & Estrin, 2003). However, these studies have also pointed out that the performance of firms improved most if they were controlled by outsiders and had brought in new management; if managers had to pay for divested firms through management buy-outs; and if the firms were owned by and foreigners instead of their own nationals. This fact was borne out in a study done by Djankov (1999) who examined the relations between ownership structure and enterprise restructuring for 960

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firms privatized between 1995-97 in Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, and Ukraine. In summary, looking at some of the studies conducted in Central and Eastern Europe and Russia and the other former Soviet republics, we come to the following conclusions: (1) in most countries, privately-owned firms performed better than stateowned firms; (2) privatization does not hurt firm performance; (3) improved performance were observed in firms where new ownership was foreign controlled and new managers were recruited; (4) privatization was more successful in Central and Eastern Europe than in Russia and the other former Soviet republics; and (5) privatization does not necessarily translate to increased unemployment. Privatization and deregulation studies are part of the larger literature of ownership and government control of resources and production. Recent empirical studies on public and private ownership also suggested that state-owned enterprises were relatively less profitable and productive than private firms (Boardman & Vining, 1989; Vining & Boardman, 1992; Pinto, Bekka, & Krajewski, 1993; Majumdar, 1996). Competition and deregulation are just as important as privatization in improving performance of firms and industrial sectors (Yarrow, 1986; Kay & Thompson, 1986; Bishop & Kay, 1989; Vickers & Yarrow, 1991; Allen & Gale, 2000). Pinto, Bekka, and Krajewski (1993) demonstrated how in the case of Poland, there was no immediate resort to large-scale privatization. Instead, the Polish government depended on deregulation of prices, introduction of foreign competition in many industries, and tight monetary and fiscal policies to improve economic performance. Other studies have pointed to the role of incentive contracts for management and workers as a way to improve performance in state-owned enterprises (Jones, 1991; Groves, Hong, McMillan, & Naughton, 1994). Li (1997) found that there were significant improvements in total productivity of state-owned enterprises when they were given more autonomy. These studies pointed to the fact that deregulation policies were also capable of improving economic performance across industrial sectors. The survey of privatization and deregulation must also include a brief examination of the Chinese experience, which was also unique in nature. China did not face the twin problems of transition (democratization and economic liberalization) that

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much of the Central and Eastern European countries and Russia and the other former Soviet republics faced. Nevertheless, there were certain interesting outcomes associated with the Chinese case which deserver mention here. Economic reforms were instituted under the leadership of Deng Xiaoping in 1978. The Chinese government relied less on privatization and more on deregulation of industrial sectors while pursuing economic reforms. Incentives and decentralization in economic decision-making were resorted to when it came to improving the performance of Chinese state-owned enterprises. These programs met with dramatic success (Li, 1997; Groves, Hong, McMillan, & Naughton, 1994; Cao, Qian, & Weingast, 1999; Lau, Qian, & Roland, 2000). One of the important reasons for not privatizing the largest state-owned enterprises in China was that these enterprises served as social security net for the country. Chinese state-owned enterprises were responsible for providing social welfare and thus privatization of these enterprises would have been difficult (Bai, Li, & Wang, 1997). The Chinese case demonstrated that achieving the goals of increased competition, increasing economic efficiency, increasing revenues, decreasing government interference may also be possible through deregulation programs and not just through privatization programs. Megginson and Netter (2001) also looked at studies done on privatization and deregulation in non-transition countries. These studies included single-industry and single-country studies. Most of these studies pointed to improvement in performance in the post-privatization period. For example, Galal, Jones, Tandon, and Vogelsang (1994), in their study of 12 large firms (mostly airlines and utilities) in UK, Chile, Malaysia, and Mexico found net welfare gains in almost all of them and no indication of reduction in worker’s pay and condition. Similarly, La Porta and Lopez-de-Silanes (1999), in their study of 218 Mexican state-owned enterprises privatized through June 1992, found that output and operating profits increased significantly for these firms. Ramamurti (1996), in his study telecom, airline and toll-road privatization programs in Latin America from 1987-91, found that privatization was particularly beneficial for the telecom sector. Eckel, Eckel, and Singal (1997), in their study of privatization of British Airlines, concluded that international competitors of this airline made significant changes to their

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strategy in the aftermath of its privatization. Boles de Boer and Evans (1996), in their study on the impact of the 1987 deregulation and the 1990 privatization of Telecom New Zealand, concluded that it brought significant benefits to consumers who were charged lower prices for phone services. Wallsten (2001), in his study of the impact of telecommunications reform in 30 African and Latin American countries from 1984-97, found that increased competition gave rise to increased per capita access and lower costs. Newberry and Pollit (1997), in their study of the UK’s Central Electricity Generating Board (CEGB) found that privatization led to cost reduction, but not necessarily benefits for the consumers. Finally, there have been some studies regarding non-transition countries that analyzed changes in performance for firms that have been privatized using public share offerings. Megginson, Nash, and Van Randenborgh (1994) compared post privatization and pre-privatization performance in 61 firms across 18 countries and 32 industries from 1961-89 and found that output, operating efficiency, profitability, capital investment spending, and dividend spending all increase. D’Souza and Megginson (2000) also found improved performance in the post-privatization period when compared to the preprivatization period in 17 national telecom companies during 1981-94, while Boardman, Laurin, and Vining (2002) found similar improvements in their study of 9 Canadian firms privatized during 1988-95. However, Boubakri and Cosset (2002), in their study of 16 African firms that were privatized through public share offerings during 1989-96 found increased capital spending by these firms but only minor changes in profitability, output, and efficiency. The above literature review pertaining to privatization and deregulation illustrated the several important outcomes of programs that were instituted in Eastern Europe, the former Soviet republics (including Russia), China, and the developing and developed countries that have not undergone political transition. Privatization and deregulation programs in Eastern Europe and the former Soviet republics were undertaken against the backdrop of political change. In recent times, privatization and deregulation of economies (transition from socialism to capitalism) took place concurrently with the transition from communist regimes to democratic regimes.

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However, India is a unique case among the recent countries whose economies have undergone privatization and deregulation since privatization and deregulation of the economy was not accompanied with changes to the nature of the political system as they were in much of the Eastern European countries. From its independence in 1947 until the early-1990s, the country restricted private sector participation, foreign trade, and foreign direct investment in the economy. Since then India has embarked on the path of privatization, deregulation, and economic restructuring. However, India has always been a liberal democratic country. There was no change in the political system of the country, accompanying its move towards a more market-oriented economy. This served to limit the magnitude of the problems associated with the transition phase. The problems faced by India were, in many cases, different from those experienced by the countries of Eastern Europe and the former Soviet republics, and even China. India is, of course, different from the developed countries (in terms of economic development), and also the other developing countries around the world, where privatization and deregulation process have been initiated, since many of these developing countries were not democracies. India’s experience with privatization and deregulation has been very different when compared to the Russian experience. The literature on privatization and deregulation has concentrated on Eastern Europe and the former Soviet republics, but India’s own case of transitioning from a socialist to a more open economy may serve as a model for other developing countries that seek to undertake privatization and deregulation programs. Additionally, India has not adopted the path of mass privatization as were the case in Eastern Europe and the former Soviet republics, and has instead opted for limited privatization and deregulation policies as a means to open up the economy. It is in the background of this deregulation process that the study of the restructuring and liberalization of the Indian civil aviation sector, including the airline industry, assumes significance.

Hypothesis As mentioned before, this study examined the factors that motivated the government to deregulate the Indian airline industry. In addition, it examined the factors

13

that influenced the government in its determination of the process and pace of deregulation of the Indian airline industry. It is hypothesized that the factors that motivated the government to deregulate the airline industry included the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. However, the government’s determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. The desire to promote economic development included such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism, and attracting foreign investment in the airline industry. The desire to improve air services included issues and factors like the increased demand for air services, poor performance of the national carriers, and the desire to encourage competition. Finally, an important motivating factor to be considered was the international trend towards liberalized airline competition. However, the strategy adopted by the government in pursuit of the abovementioned goals, was influenced by several conditioning factors. These factors included established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. Established international practices and procedures included the bilateral system of air services agreements, ‘freedoms of the air’, nationality restrictions, and International Civil Aviation Organization (ICAO) and World Trade Organization-General Agreement in Trade and Services (WTO-GATS) provisions. National security and safety concerns included India’s relations with other countries, the impact of terrorism and organized crime, the government/military’s access to civilian aircraft, and the maintenance of aviation safety. Finally, an important conditioning factor to be considered was the pluralist nature of Indian politics. This included issues like the demands and compulsions of coalition and minority government, the impact of interest groups and labor unions, and the role of the different states of India. In order to test the hypothesis, interviews of senior government officials belonging to the Ministry of Civil Aviation, Government of India, were conducted. This helped in understanding the changes in the regulatory system in the airline industry in

14

India and the rationale and strategy behind the policies adopted by the government. This study confined itself to the conduct of interviews with government officials of the Ministry of Civil Aviation, Government of India, because the scope of this study was limited to examining the motivations of the government as it pertained to the deregulation of the airline industry in India. Apart from interviews, archival research was conducted, and press accounts were examined to test this hypothesis.

Research Methodology The research was conducted in India and the US. The method of data collection was through the conduct of interviews of the subjects outlined above. Apart from interviews, archival research was another important component of the research methodology. Documents which dealt with policies pertaining to domestic air transport, airport infrastructure, bilateral air service agreements, and international civil aviation cooperation agreements were examined. Press accounts were also examined as they gave an indication about Indian elite discussion over the need for reforms in the civil aviation sector, in the context of the changing international environment. These accounts highlighted their views regarding the role the private sector, including foreign actors, in the reforms process. All interviews were conducted in English. All the interviewees possessed adequate reading, writing, and speaking abilities in the English language. In India, the research involved the conduct of interviews of officials belonging to the Ministry of Civil Aviation, Government of India. The Ministry of Civil Aviation, Government of India, is the nodal ministry responsible for the formulation of national policies and programs for development and regulation of civil aviation. Its functions also extend to overseeing airport facilities, air traffic services, and transportation of passengers and goods by air. The primary purpose of interviewing senior officials of the Ministry of Civil Aviation, Government of India, was to analyze the motivations behind deregulation of the airline industry in India. In addition, these officials were asked to outline the different policies that had been implemented as part of the deregulation of the airline industry in India. These officials were asked to comment on the changes that had taken place in the civil aviation sector since the policies associated with deregulation of the airline industry

15

had been implemented. Questions were also asked regarding the short-term and long-term consequences expected as a result of the policies that had been implemented. For the purpose of this study, six clusters of variables were used to organize the interviews. These variable clusters were selected to help examine the factors that motivated the government to deregulate the Indian airline industry, and the factors that influenced the government in its determination of the process and pace of deregulation of the Indian airline industry. The specific questions included in each variable cluster are outlined in Appendix A. The six clusters of variables are: Development: This category of questions investigated what impact, if any, the desire to promote economic development had on the government’s decision to deregulate the airline industry. Demands: This category of questions investigated what impact, if any, the desire to improve air services motivated the government to deregulate the airline industry. International Trends: This category of questions investigated what impact, if any, current trends in the international airline industry had on the government’s decision to deregulate the airline industry. International Practices and Procedures: This category of questions investigated what impact, if any, international practices and procedures had on the government’s decision to deregulate the airline industry. Concerns: This category of questions investigated what impact, if any, national security and safety concerns had on the government’s decision to deregulate the airline industry.

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Pressures: This category of questions investigated what impact, if any, India’s political culture had on the government’s decision to deregulate the airline industry.3

Examining these categories of variables helps us understand the factors that motivated the government to deregulate the Indian airline industry. In addition, we also get a clear picture of the factors that influenced the government in its determination of the process and pace of deregulation of the Indian airline industry. Through the examination of these categories of variables, one is able to understand the policies pertaining to domestic air transport, airport infrastructure, bilateral air services agreements, and international civil aviation cooperation agreements. Finally, it also gives us an indication about Indian elite discussion over the need for reforms in the civil aviation sector, in the context of the changing international environment, and their views regarding the role the private sector, including foreign actors, in the reforms process. The duration of each interview conducted ranged from between half an hour to two hours. No subject was required to be interviewed more than twice. The researcher conducted the interviews and collected the data. He possessed the required ethics training on Human Subjects Research and this study has been approved by the Institutional Review Board (IRB) for Human Subjects Research at Miami University, Oxford, Ohio, USA. The total number of subjects interviewed is two. Their ages ranged from 25-60 years. All interviews of subjects were conducted in English. Officials of the Ministry of Civil Aviation, Government of India, are required to possess adequate reading, writing, and speaking abilities in the English language as pre-requisite for their employment. In addition, the official language of India is English; therefore conducting interviews in English was considered appropriate. The interviews of subjects were conducted at the head offices of the Ministry of Civil Aviation, Government of India, located in New Delhi, India. The employers 3

For the purposes of this study, political culture is defined as a distinctive and patterned way of thinking that consists of inherited set of beliefs, attitudes, and opinions about how governmental, political, and economic life should be carried out.

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(Ministry of Civil Aviation, Government of India) of the subjects were contacted to identify the person(s) authorized to disseminate information to the public. Permission was sought to interview these subjects. The subjects selected for interview possessed the following characteristics:

(a) They were authorized by the Ministry of Civil Aviation, Government of India, to disseminate information to the public.

(b) They were in a position to disseminate information being requested.

(c) They possessed adequate knowledge about the issue and were in a position to comment on it.

It must be made clear that, some of the anticipated subjects of this study refused to grant an interview. In such cases, the researcher relied on evidence drawn from archival research and examination of press accounts for testing the hypothesis. Apart from interviews, archival research was another important component of the research methodology. Documents pertaining to India’s civil aviation sector available with the Central Public Information Office (CPIO) of the Ministry of Civil Aviation, Government of India, New Delhi, India, were examined. Specifically, documents that dealt with policies pertaining to domestic air transport, airport infrastructure, bilateral air service agreements, and international civil aviation cooperation agreements were examined. In addition, documents specifying the volume of international air passenger traffic to and from India were also examined. Finally, the examination of press accounts gave us an indication about Indian elite discussion over the need for reforms in the civil aviation sector, in the context of the changing international environment and their views regarding the role the private sector, including foreign actors, play in the reforms process. These accounts help examine their views regarding involvement of foreign players in the airline industry and the civil

18

aviation sector in general. Press accounts that inform us about the volume of international air passenger traffic to and from India were also examined.

Organization of Study The introductory chapter clarified the claims and arguments made. It identified the research question the study seeks to address and argued as to why research on this subject is important. Next, it assessed the literature that informed the research question and provided a synthesis of the theoretical and empirical work done on the subject. A hypothesis was offered in response to the research question. Finally, the research methodology section outlined the approach that was employed to test the validity of the hypothesis and delineated the qualitative framework, operationalized variables, identified data sources, and specified analytical tools and techniques. Chapter Two discusses the evolution of the airline industry in India. This chapter forms the background of the study. This chapter analyzes archival records and press accounts relevant to the subject obtained from various sources. Beginning with an overview of civil air services in India since the country’s independence in 1947, it will present information regarding the regulatory authority, airlines, and airports in India. It will also outline the reforms instituted in the civil aviation sector since 1991 and the current situation regarding the airline industry. Following this, it will discuss deregulation policies implemented by the government pertaining to the domestic and international airline industry. This chapter will also introduce the factors that may have motivated the government to deregulate the airline industry, namely the desire to promote economic development, improve air services, and the international trend towards liberalized airline competition. Chapter Three presents the factors that may have influenced the government in its determination of the process and pace of deregulation of the Indian airline industry. These conditioning factors, which may have informed the government’s strategy regarding deregulation, are established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. Chapter Four describes the fieldwork undertaken as part of the research. It begins by describing the organization of the airline industry in India. Next, it presents the results

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of the interviews of senior officials of the Ministry of Civil Aviation, Government of India. The evidence gathered is used to evaluate the validity of the hypothesis offered. Chapter Five is the concluding chapter and summarizes the main findings of the research, discusses some observations and presents recommendations pertaining to the airline industry in India.

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CHAPTER TWO Evolution of the Airline Industry in India Introduction The purpose of this chapter is to discuss the evolution of the airline industry in India. This chapter forms the background of this study. It analyzes scholarly work, archival records, and press accounts relevant to the subject obtained from various sources. Beginning with an overview of civil air services in India prior to the country’s independence in 1947, it will present information regarding the regulatory policies, airlines, and airports that existed in India prior to the deregulation of the industry. Following this, it will also examine the airline industry in the post-deregulatory period. This chapter will outline the reforms carried out in the civil aviation sector since the early-1990s and the current situation regarding the airline industry. Next, it asserts some of the factors that may have motivated the government to deregulate the airline industry. These factors include the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. The desire to promote economic development includes such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism, and attracting foreign investment in the airline industry. The desire to improve air services includes issues and factors like the increased demand for air services, poor performance of the national carriers, and desire to encourage competition. Finally, an important motivating factor to be considered is the international trend towards liberalized airline competition. Following this, it will discuss deregulation policies implemented by the government pertaining to the domestic and international air transport services in India. In effect, this chapter is a comprehensive exploration of the Indian airline industry and the changes it has undergone over a period of more than half a century.

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Historical Landmarks in Indian Airline Industry The first air display in India was organized at the Tollygunj Club in Kolkata (Calcutta) on December 28, 1910 (Indian Aviation, 1993). Commercial air transport in the country began with the carriage of air mail on February 18, 1911 (Mani & Reddy, 1994). On October 1, 1915, the government established the Central Flying School at Sitapur, under the control of Army Headquarters (Ramamirtham, 1975). The first long distance flight from Cairo to Kolkata by a Handley Page aircraft took place between November 29 to December 12, 1918 (Bhatt, 1997). During November 10-13, 1924 KLM Royal Dutch Airlines flew their first flight by Fokker II from Amsterdam to Karachi (now in Pakistan) and then to Kolkata via Ambala and Allahabad, with Jakarta, Indonesia as the final destination (Saraswati, 2001). Between December 26, 1926 and January 8, 1927, Imperial Airways flew their first flight from Cairo to Karachi and Delhi. The Department of Civil Aviation was established in April 1927 (Indian Aviation, 1993). The first flying club was established in Mumbai on May 9, 1928. The first non-stop flight from UK to India took place during April 24-26, 1929 (Mani & Reddy, 1994). It covered a distance of 4,310 miles in 50 hours and 37 minutes. The first domestic carrier, the Delhi Flying Club, started operations in India between Karachi and Delhi in 1932 (Bhatt, 1997). Air India, the country’s future national carrier for international operations, was founded as Tata Airlines (a division of the Tata Sons Limited, now the Tata Group) in 1932 (Saraswati, 2001). The second domestic carrier, Indian National Airways began operations in May 1933. Following the end of the Second World War, regular commercial operations were re-started in India and Tata Airlines became a public limited company, called Air India Limited, on July 29, 1946 with its headquarters in Mumbai (Ramamirtham, 1975). On October 1, 1946, the Air Transport Licensing Board was set-up under the Directorate General of Civil Aviation (DGCA) (Indian Aviation, 1993). On January 5, 1947, Trans World Airways (TWA) became the first international carrier to operate from Mumbai airport. Pan Am Airlines’ service to Kolkata was inaugurated on June 21, 1947 (Indian Aviation, 1993). On August 15, 1947, India becomes independent after almost two hundred years of British rule.

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The first Lockheed Constellation L-749A aircraft of Air India landed at Mumbai airport on March 16, 1948. In March 1948, Air India International was established, with government holding 49% of the equity and Tata Sons Limited and the public holding the remainder (Anwar, 1954). Service began in the middle of the same year with flights between Mumbai and London (the first on a regular basis by any Asian airline). On May 25, 1949, Bharat Airways began its Kolkata-Bangkok-Ho Chi Minh City (Saigon)-Hong Kong services. Kalinga Airlines began operations between Kolkata and Agartala. Scandinavian Air Services (SAS) started operations to Kolkata on October 26, 1949. On December 1, 1952, Air India International inaugurated all tourist class flights to Nairobi (Indian Aviation, 1993). The Government of India nationalized the airline industry in 1953. As part of the Air Corporations Act, 1953, the government purchased a majority stake in Air India International on August 1, 1953, thus giving birth to Air India International Limited (Saraswati, 2001). Henceforth, international air services were to be provided by Air India International Limited while domestic services would be provided by Indian Airlines. Airlines which offered domestic services, such as Bharat Airways, Indian National Airways, Kalinga Airlines, Air Services of India, Airways India, Deccan Aviation, and Himalayan Aviation, were integrated into the single national domestic carrier Indian Airlines Limited (Ramamirtham, 1975). Thus, domestic scheduled services became the monopoly of Indian Airlines. The combined fleet of Air India International Corporation and Indian Airlines Corporation in 1953 consisted of 74 Douglas DC-3 Dakotas, 12 Vickers Vikings, 3 Douglas DC-4s, 5 L5 Sentinels, one Beech 18, one Beech 17, one Avro, one Dove, and one Saab Saffir Aircraft (Bhatt, 1997). In 1954, Air India acquired the Lockheed Super Constellations L1049s and began services to Singapore, Bangkok, Hong Kong and Tokyo (Indian Aviation, 1993) Air India International entered the jet age in 1960 with the induction of its first Boeing 707. Jet services to New York via London were inaugurated in May, 1960. On June 8, 1962 the airline re-christened itself Air India. In 1971, the airline took delivery of its first Boeing 747-200. For Indian Airlines, the jet age began for with the introduction

23

of the Sud Aviation Caravelle airliner in 1964. Later, the airline also took delivery of the Boeing 737-200s in the early 1970s (Mani & Reddy, 1994). In 1971, the International Airports Authority of India (IAAI) was established and tasked with the responsibility to administer the major international airports in the country (Ramamirtham, 1975). In April 1976, Indian Airlines inducted the Airbus A300 and established the regional airline Vayudoot

in 1981. In 1986, the National Airports

Authority of India (NAAI) was created and tasked with the responsibility to administer all domestic airports (Mani & Reddy, 1994). In the same year, Air India took delivery of the Airbus A310. With this, the airline became the largest operator of this type of aircraft in passenger service. In 1988, Air India also inducted two Boeing 747-300s and in 1993, took delivery of the flagship of its fleet, the Boeing 747-400 (Bhatt, 1997). The economic liberalization program initiated by the government in the early1990s affected the civil aviation sector as well. In 1989, the government approved the establishment of air taxi services with a view to encourage tourism (Hooper, 1998). The government also repealed the Air Corporations Act of 1953 and instituted the Air Corporations (Transfer of Undertakings and Repeal) Act of 1994 thus converting Air India and Indian Airlines into public limited companies (Saraswati, 2001). In addition, domestic scheduled services, which was until then a monopoly of these two national carriers, were opened up to private commercial carriers as well. For Indian Airlines, this meant stiff competition from domestic private commercial operators including Jet Airways, Air Sahara, Modiluft, and East West Airlines (Indian Aviation, 1993). Although the latter two later became defunct, by 2003 a new breed of low-cost airlines, led by Air Deccan, successfully challenged Indian Airlines’ traditional dominance of Indian markets. In 1996, Air India began services to Chicago (O’Hare), its second gateway to the US. In December 2004, Air India leased three Boeing 777-200 ER aircraft from United Airlines and introduced three new routes: Delhi-Frankfurt-Los Angeles, Delhi-AmritsarBirmingham-Toronto, and Delhi-Dhaka-Kolkata-London (Air India, 2008). In 2006, Indian Airlines was renamed Indian. In the face of increased competition the government decided to integrate Air India and Indian. The two airlines formally merged on August 24, 2007 and the new airline was christened Air India. On July 26, 2007, the airline

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received the new Boeing 777-200 allowing it to launch services to two additional US gateways, Newark , New Jersey and San Francisco (Air India, 2008).

Regulation of the Airline Industry in India The civil aviation industry in India was heavily regulated since the early-1950s up until the mid-1980s (Hooper, 1997, 1998; Raguraman, 1998). The state carriers exercised monopoly over domestic scheduled air services. This control was part of the overall economic policy regime adopted by the government during this period. As part of this policy, the public sector occupied the dominant position in the economy. The private sector was not only subservient to the public sector but also restricted by the state in terms of what kind of goods it could produce and in what quantity. With respect to the outside world, high tariffs on imports and restrictions on foreign investment, in order to protect local industry and business, characterized government policy. The strategy of import substitution industrialization was adopted by the government. Although government control over the economy was not as rigid as under the Soviet system, the influence exercised by the government with respect to the nature and direction of the economy was quite substantial. The purpose of this kind of economic system was to transform India from an agricultural society to a modern industrial society within a few decades. Civil aviation was one of the first industrial sectors to be impacted by government involvement as it embarked on its stated road of socialism (Josiam, 1999; Shastri, 1997). At the time of independence, India was left with Second World War surplus aircraft. Soon private commercial operators began to demand licenses to operate domestic services. Bowing to pressure, the government decided to issue licenses to a large number of operators. By mid-1947, licenses had been issued to eleven airlines (Saraswati, 2001). The airlines began to increase their capacity by purchasing several aircrafts. The result was that the airlines offered too many seats even while there were too few passengers. In an effort to garner maximum number of passengers, airlines frequently undercut each other resorting to predatory pricing. The result was that capacity utilization fell, losses mounted, and several operators went bankrupt.

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The government’s response was to set up an Air Transport Inquiry Committee to look into the functioning of the industry. The Committee noted that it was the government itself that was responsible for the state of affairs and recommended the restructuring of the industry by allowing voluntary mergers, delicensing of some airlines, reallocation of routes, and financial assistance (including loans) to re-equip airlines with newer aircraft. It recommended nationalization of the industry only as a last resort to save the industry. According to the Committee,

“[The] operating companies are already in the field, and unless there were imperative necessity, there would appear to be no compulsion to take such a serious step as nationalization at present.”4

However, the government appeared unwilling to shoulder the burden of financial cost that would come as a result of restructuring of airlines. It decided instead to nationalize the industry and unify the several different airlines. During the introduction of the bill for nationalization of the airlines in Parliament, the government claimed that such a policy would be advantageous for the industry as it would enhance utilization of existing equipment and personnel, and also help the government serve the requirements of the country’s defense. In addition, the government claimed that: “Air transport was a public utility service and ought to be developed in the national interest, unhampered by the paramount necessity of making a profit which would be the over-riding consideration in private enterprise...[S]tate organization would also be able to plan the future of the industry in a more comprehensive way.”5

As a result, the Air Corporations Act, 1953 was established which outlined the policy/regulatory regime that held sway between 1953 and 1994.

4

Air Transport Inquiry Committee Report, Cited in B. Gidwani’s “History of Air Transport”. New Delhi: Suneja Book Centre, 1954. 5 See India, House of the People, Parliamentary Debates: Official Report, 29 April 1953, pp.4635-4636.

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(a) Air Corporations Act, 1953 The Air Corporations Act, 1953, had three major components: policy concerning Air India and Indian Airlines; general regulatory powers of the Government of India regarding civil aviation, and domestic scheduled air services policy. With regard to the status and function of Air India and Indian Airlines, Chapter II, Sec.3 (1), and Sec.7 (1) of the Air Corporations Act, 1953 respectively stated that:6

•

With effect from such date as the Central Government may, by notification in the Official Gazette, appoint, there shall be established two Corporations to be known as “Indian Airlines” and “Air India International”.

•

Subject to the rules, if any, made by the Central Government in this behalf, it shall be the function of each of the Corporations to provide safe, efficient, adequate, economical and properly co-ordinated air transport services, whether internal or international or both, and the Corporations shall so exercise their powers as to secure that the air transport services are developed to the best advantage and, in particular, so exercise those powers as to secure that the services are provided at reasonable charges.

Chapter II, Sec.7 (2a, 2b, 2e) of the Act conferred on the two corporations certain powers that accorded them prime position in the Indian air transport sector:

•

…each of the Corporations shall, in particular, have power; to operate any air transport service, or any flight by aircraft for a commercial or other purpose, and to carry out all forms of aerial work; to provide for the instruction and training in matters connected with aircraft or flight by aircraft of persons employed, or desirous of being employed, either by the Corporation or by any other person; to repair, overhaul, reconstruct, assemble or recondition aircraft, vehicles or other machines and parts, accessories and instruments thereof or therefore and also to manufacture such parts, accessories and instruments, whether the aircraft, vehicles or other machines are owned by the Corporation or by any other person.

6

Air Corporations Act, 1953, Directorate General of Civil Aviation, India, 2007a.

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The Air Corporations Act, 1953 also granted powers to the government to regulate the functioning of the civil aviation industry in the country, particularly with respect to Air India and Indian Airlines. Specifically, Chapter VI. Sec.34 (1) and Sec.2 (a) and (b) outlined the power of Central Government to give directions:

•

The Central Government may give to either of the Corporations directions as to the exercise and performance by the Corporation of its functions, and the Corporation shall be bound to give effect to any such directions.

•

The Central Government may, if it is of opinion that it is expedient in the national interest so to do, after consultation with the Corporation concerned, direct either of the Corporations – to undertake any air transport service or other activity which the Corporation has power to undertake; to discontinue or make any change in any scheduled air transport service or other activity which it is operating or carrying on.

In addition, Chapter III, Sec.2 and Sec.3, and Chapter VI, Sec.35, Sec.36 (1), and Sec.37 (1) outlined the power of the government vis-à-vis the two corporations with regard to finances and planning respectively:

•

The Central Government may provide any further capital that may be required by either of Corporations for the carrying on the business of the Corporation or for any purpose connected therewith on such terms and conditions as the Central Government may determine.

•

Each of Corporations may, with the consent of the Central Government, or in accordance with the terms of any general authority given to it by the Central Government- (a) borrow money for all or any of the purposes of the Corporation, and (b) secure the payment of money borrowed by it or any interest thereon by the issue of bonds, debentures, debenture-stock or any mortgage or charge or other security on the undertaking of the Corporation or any part of it or on any of its properties.

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•

Each of the corporations shall prepare and submit to the Central Government, not less than [two months] before the commencement of the financial year of the Corporation a statement showing the programme of operation and development of air transport services to be operated by the Corporation and its associates during the forthcoming financial year and its other activities as well as its financial estimate in respect thereof, including any proposed investment of capital and increase in the strength of its total staff.

•

Each of the Corporations shall, as soon as may be after the end financial year, prepare and submit to the Central Government, in such form as may be prescribed a report giving an account of its activities during the previous financial year, and the report shall also give an account of the activities, if any, which are likely to be undertaken by the Corporation during the next financial year.

•

Neither Corporation shall, without the previous approval of the Central Government – (a) undertake any capital expenditure for the purchase or acquisition of any immovable property or aircraft or any other thing at a cost exceeding [such amount as the Central Government may, from time to time, by order, fix in this behalf.] (b) enter into a lease of any immovable property for a period exceeding [ ten years] or (c) in any manner dispose of any property, right or privilege having an original or book value exceeding [such amount as the Central Government may, from time to time, by order, fix in this behalf].

To further solidify government control over the two corporations, Chapter II, Sec.4 (1) and Sec.8 (1) also authorized the creation of a board of directors and a managing director for the management of the affairs and business of the two corporations:

•

The general superintendence, direction and management of the affairs and business of each of the Corporations shall vest in a Board of directors which may exercise all such powers and do all such acts and things as may be exercised or

29

done by the Corporation under this Act. The Board of directors shall consist of a Chairman to be appointed by the Central Government, and not less than eight and not more than fourteen other directors to be appointed by the Central Government and the Chairman or any other director may be required to render whole time or part-time service as the Central Government may direct.

•

For the purpose of enabling it efficiently to discharge its functions under this Act, each of the Corporations shall appoint [managing director] and, subject to such rules as may be prescribed in this behalf, may also appoint such number of other officers and employees as it may think necessary: Provided that the appointment of the [managing director] and such other categories of officers as may be specified after consultation with the Chairman in such rules shall be subject to the approval of the Central Government.

Finally, Chapter IV, Sec.18 (1) and (2) of the act is particularly important as it outlined the reservation of domestic scheduled air transport services to the corporations thereby declaring monopoly for Indian Airlines in the domestic air transport sector. According to the respective sections:

•

After the appointed date, it shall not be lawful for any person other than the Corporations or their associates to operate any scheduled air transport service from to, in or across India.

•

Any person who operates a scheduled air transport service in contravention of the provisions of this section shall be liable in respect of each offence to a fine which may extend to one thousand rupees, or to imprisonment which may extend to three months, or to both.

In continuation, Chapter IV, Sec.19 nullified the licenses provided to private commercial operators who used to ply domestic routes:

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•

With effect from the appointed date, all licenses granted under the Indian Aircraft Act, 1934 (22 of 1934) or under the rules made thereunder for the operation of scheduled air transport services shall cease to be valid.

As such, it is clear that the government assumed all powers to regulate the functioning of the civil aviation sector in India from 1953. Henceforth, Indian Airlines and Air India would be wholly owned by the government with control extending to management and expenditure of both airlines. Just as importantly, the government also had the authority to determine the nature of competition in the domestic sector. It shut out private commercial operators, both foreign and domestic, from offering domestic scheduled air services, thus assuring monopoly to these two airlines in the process (Saraswati, 2001; Hooper, 1997, 1998; Raguraman, 1998; Bhatt, 1997).

(b) Performance of Indian Airlines and Air India during regulatory regime If we were to scrutinize the financial performance of Indian Airlines and Air India, we would find that both corporations are profit-making entities and have served their functions adequately. Indeed, for the majority of their existence, both the corporations have delivered good results (See Table 1).

Table 1: Five-Year Average Profits of Air-India and Indian-Airlines (in US$ Mill.)

Years

Air India

Indian Airlines

1960-64

3.671

1.342

1965-69

3.321

(-)0.045

1970-74

(-)2.137

(-)2.585

1975-79

16.637

9.206

1980-84

23.432

24.632

1985-89

23.269

20.703

Source: ICAO, Civil Aviation Statistics of the World (1954-1991)

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(i) Indian Airlines and the Regulatory Regime The previous table demonstrates that Indian Airlines was a profitable corporation for much of its history. However, the data does not present the whole picture. For example, over a period of thirty years since 1960, Indian Airlines has made a profit of only US$140 million, averaging about US$5 million annually (See Table 2).

Table 2: Declining returns for Indian Airlines 1988-89 to 1993-94 in US$ mill.

Year

Profit/Loss

1988-89

58.5

1989-90

43.59

1990-91

25.5

1991-92

1.78

1992-93

(-)66.15

1993-94

(-)82.57

Source: Ministry of Civil Aviation, Government of India, 2008f. Annual Report (various years)

One must also remember that the profits generated were due to its monopoly status in India. More importantly, Indian Airlines has been incurring heavy losses beginning in the early 1990s. During the period from 1988-89 to 1994-95, its performance has been less than satisfactory and its profitability declined markedly. During the four-year period from 1990-91 to 1993-94, Indian Airlines incurred losses amounting to US$121.44 million. It must be pointed out that although the Air Corporations Act of 1953 monopolized domestic scheduled services for Indian Airlines, the government still allowed air taxi operators to ply non-scheduled services within the country. From 1991-92 to 1992-93, traffic carried by air taxi operators increased to 41,916 to 725,812 (an increase of 1,632%), while that of Indian Airlines declined over the same period from 8.32 million to 7.27 million (a loss of 14.5%) (Bhatt, 1997: 194).

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The Committee on Public Undertakings (1993-94) of the Lok Sabha (The Lower House of the National Assembly), in its Thirty-Third Report highlighted the fact that Indian Airlines had incurred losses to the tune of almost US$90 million for the nine month period ending December 31, 1993, due to the substantial increase in frequency of non-scheduled services by air taxi operators offering non-scheduled services.7 In addition, Indian Airlines’ earnings suffered from excess capacity on certain routes within India as air taxi operators competed with each other to provide non-scheduled services (Bhatt, 1997: 145). Finally, Indian Airlines also suffered from lack of adequate fleet. Government reluctance to invest in fleet replenishment has meant that Indian Airlines’ fleet was relatively old with an average age of 8.67 years (Bhatt, 1997: 145). Inadequate capacity and ageing aircraft has led to poor service and limited routes, and consequently loss of market share for Indian Airlines.

(ii) Air India and Bilateralism Unlike the regulated skies of India which have facilitated Indian Airlines’ growth, Air India has had to function as an international airline competing with the world’s major airlines. In order to assist Air India in competing with foreign airlines, the government heavily subsidized it. Although the government could not regulate international air services to the same extent as domestic air services, it used subsidies to protect Air India. However, international aviation also suffers from stifling regulations. In fact, international aviation is regulated by bilateral agreements that determine issues like market access and pricing. The Chicago Convention on International Civil Aviation of 1944, which laid the basis for the aviation regime, recognized the absolute sovereignty of the state over its airspace and its right to regulate the operation of scheduled airlines over, from, and into its territory.8 Through the system of bilateral agreements between states, international air transport develops. Bilateral agreements codify the rights of states to operate aircraft to

7

See Committee on Public Undertakings (1993-94). Thirty-Third Report: Indian Airlines: Under-utilization of fleet, idle wages to flying crew, avoidable payment on leased aircraft, wasteful expenditure on training of pilots, and delay in commissioning of jet engine shop. New Delhi: Lok Sabha Secretariat, 1994). 8 See Chicago Convention on International Civil Aviation, ICAO, Doc. 7300/6, 1980.

33

and from other states. The bilateral regime is based on reciprocation, which means that a state has a right to 50% of its international traffic. Over a forty year period since independence, Indian carriers’ share in the scheduled traffic of Asia-Pacific carriers, dropped from 10.5% in 1961 to half of that figure by 1990. According to the Committee on Public Undertakings’ (1988-89) FiftyFirst Report,

“The reason is lack of growth [of] capacity. Whereas we have remained stagnant in the last ten years, other airlines have grown tremendously.”9

The Asia-Pacific carriers were growing at a much faster pace than Indian carriers. Just as importantly, the share of India’s carriers in India’s international traffic also dropped appreciably as is clear from Table 3.

Table 3: Share of India’s Carriers in India’s International Traffic (percentage)

Years

Indian Carriers

1971

51.09

1975

45.69

1980

45.56

1985

35.96

1990

29.94

Source: ICAO, Civil Aviation Statistics of the World (1954-1991)

This issue was of serious concern to India due to the nature of the aviation regime. India’s carriers have witnessed a marked decline in the share of international traffic since 1971. By 1990, foreign carriers, which in 1971 shared the international traffic of India equally with India’s carriers, now commanded more than 70% of the market. The loss in 9

See Committee on Public Undertakings (1988-89). Fifty-first Report: Air India-Fare Aspect. New Delhi: Lok Sabha Secretariat, 1989).

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terms of outflow of foreign exchange and resulting pressure on the country’s balance of payment was quite significant. In a scathing indictment of India’s record in securing and exercising bilateral rights, the Committee on Public Undertakings (1978-79) in its Forty-Eighth Report titled “International Airports Authority of India – Imbalances in the Utilization of Airports and in the Operation of Foreign Airlines vis-à-vis National Carriers”, found that despite Air India’s right to 50% of the international air traffic to and from India, foreign airlines were found to be operating 217 flights as against only 170 flights by India’s carriers to each other’s countries. It claimed that the bilateral arrangements were, “heavily weighted against the national interest, granting undue concessions to the foreign airlines.”10

For example, the report pointed out that Swissair was operating 7 flights a week to India compared to Air India’s only 3 flights a week; Qantas was operating 3 flights a week to Air India’s 1, and Pan Am’s 12 to Air India’s 7, and Aeroflot’s 5 to Air India’s 2 among others (Nayar, 1994). The decline in India’s share in the country’s international traffic, particularly since the 1980s, has been attributed to the lack of increase in capacity of Air India. Fewer planes meant fewer services. As Table 4 points out, seat capacity of Air India, measured in terms of Available Seat-kilometer (ASKM), which is “number of seats multiplied by kilometers flown”, over the period of 1980 to 1991 increased by an average of only 2.2% per year. This loss in capacity is further demonstrated once we look at the fleet size of Air India. In 1980, the fleet consisted of 17 aircraft. From 1980 to 1987, the fleet size remained almost the same. Consequently, Air India was unable to cope with the rising air traffic to and from India, while other foreign airlines expanded their fleet. The reasons for stagnation in capacity lies in the government policy of placing restrictions on the expansion of Air India’s fleet because of the high amount of expenditure it would involve and its consequent impact on the country’s balance of 10

See Committee on Public Undertakings (1978-79). Forty-Eighth Report: International Airports Authority of India – Imbalances in the Utilization of Airports and in the Operation of Foreign Airlines vis-à-vis National Carriers. New Delhi: Lok Sabha Secretariat, 1979b

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payments situation (Sivaraman and Singh, 1994). The poor performance of the public sector, which served as the bulwark of the economy, during the mid-1960s and early1970s had led to an economic crisis during the mid-1970s. Recovering from this economic crisis took a long time and even during the early-1980s, the financial situation of the country was not very good. As such, the government was disinclined to invest in capital-intensive programs like the acquisition of new jet aircrafts for Indian Airlines and Air India.

Table 4: Growth of Capacity at Air India, 1980-1991

Year

ASKMs (millions)

ASKMs

Actual

% Increase

1980

10,596.4

15.8

1981

11382.5

7.4

1982

12,317.5

8.2

1983

13,194.1

7.1

1984

12,468.9

(-)5.5

1985

11,503.6

(-)8.4

1986

11,230.2

(-)2.4

1987

12,985.7

15.6

1988

13,473.6

3.8

1989

14,461

11.4

1990

13,820.6

(-)4.4

Source: Ministry of Civil Aviation, Government of India, 2008f. Annual Report (various years)

The profits generated by Air India, as is evident from Table 1, therefore present an incomplete picture. This fact was pointed out by the Committee on Public

36

Undertakings (1986-87) pointed out in its Fourteenth Report.11 It must also be pointed out that Air India did not make profits on all of its operations. Since the mid-1970s, the airline has made regular profits on only one of its sixteen routes. This route is the IndiaMiddle East route and included services to Bahrain, Kuwait, Qatar, Saudi Arabia, Oman, and the United Arab Emirates. Profits on this route were largely the result of frequent travel by migrant workers from India, who went to the Middle East in the aftermath of the rise in oil prices and rapid economic growth. The Committee noted that the, “India-Gulf route has been the revenue spinner for Air India…[B]ut for the India-Gulf route Air India would have been incurring heavy losses every year”12

Table 5: Air India’s Rankings among IATA Airlines

Year

Passenger-kilometers

Passengers Carried

Performed 1979

15

-

1980

14

-

1981

14

-

1982

14

-

1983

15

-

1984

15

26

1985

16

26

1986

18

27

1987

19

27

1988

23

27

1989

22

31

1990

29

37

Source: IATA, World Air Transport Statistics, 2007 (various years) 11

See Lok Sabha. Committee on Public Undertakings (1986-87). Fourteenth Report: Air India – Working Results and Traffic Growth. New Delhi: Lok Sabha Secretariat, 1987 12 Ibid.

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Air India’s problems were the results of the policy regime under which it functioned (Nayar, 1994). State ownership and associated lack of managerial autonomy led to extra-market (political) priorities in investment decisions. This affected Air India’s ability to renew and expand its fleet. Inadequate capacity and ageing aircraft led to limited and poor service and consequently loss of market share and decline in its position as is evident from Table 5. As is clear from the preceding discussion, the performance of Indian Airlines and Air India, the two national carriers of India, was less than satisfactory. Even though the regulatory regime, in the form of the Air Corporations Act of 1953, conferred special status to these two corporations, the latter have not been able to perform well. Despite some government support and encouragement from time to time both these corporations have found it difficult to compete. The disappointment felt was particularly acute in the case of Indian Airlines, which had been assured of monopoly in domestic scheduled air services. Indian Airlines lost market share to air taxi operators during the late-1980s and early-1990s. Similarly, Air India, despite its right to 50% share of the traffic to and from India under the aviation bilateralism regime, progressively lost its share of India’s international traffic beginning in the 1970s. In summary, the regulatory regime did not translate into positive outcome for Indian Airlines and Air India.

Factors responsible for Deregulation of the Airline Industry in India Before we examine the deregulation of the airline industry in India, it is seems pertinent to attempt to offer a brief explanation regarding some of the factors that may have motivated the government to deregulate the Indian airline industry. Although, the financial performance of national carriers and the demand for air services were important considerations for the government, they were by no means the only ones. There were other both domestic and international forces that may have motivated the government to deregulate the industry. As mentioned earlier, this section will present some of the factors that may have motivated the government to deregulate the airline industry. These included the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. The desire to promote economic

38

development includes such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism and attracting foreign investment. The desire to improve air services included issues and factors like the increased demand for air services, poor performance of the national carriers, and desire to encourage competition. Finally, an important motivating factor to be considered is the international trend towards liberalized airline competition.

(a) Economic development As mentioned earlier, the desire to promote economic development included such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism and attracting foreign investment in the airline industry. With regard to the desire to promote economic development, one must keep in mind that shortly after independence, India's policy makers had adopted a strongly nationalist posture towards economic development. The government established several public sector enterprises, protected the local private sector, and imposed high tariffs on imported goods. The goal was to promote self-sufficiency through the development of indigenous goods and technology. Industrial policy, therefore, involved import substitution, rather than export promotion (Josiam, 1999; Shastri, 1997). However, these economic policies brought relatively slow economic growth. When compared with the developing countries in the Asia-Pacific region, India fared badly. Its share of world output and exports fell, and even human development indexes lagged far behind those of East Asia (Josiam, 1999; Desai, 1996). India's failure to match East Asian growth rates had also diminished its international influence over the last three decades. A major balance of payments crisis in 1991 presented an opportunity for the government to overturn central planning and institute economic reforms. The opening up of the Indian economy was initiated by the reforms introduced since 1991 by the minority Congress government of Prime Minister P. V. Narasimha Rao and his Finance Minister (and current Prime Minister of India), Dr. Manmohan Singh. According to P.V. Narasimha Rao,

39

“All [these] reforms were necessary. They are part of a long process of liberalization, bringing India into line with the changes, the opening up, in the rest of the world around us.”13

However, some piecemeal attempts at reforms had been initiated even earlier by the Rajiv Gandhi government during the mid-1980s. The deregulation of the airline industry was part of the larger economic liberalization agenda adopted by the government. As the Committee on Transport and Tourism of the Parliament of India (Rajya Sabha) pointed out in its Fourth Report on Air Corporations (Transfer of Undertakings and Repeal) Bill, 1992,

“Under the new economic policy, investment in the private sector in the air transport industry has been permitted and the industry dereserved from the exclusive purview of the public sector”.14

Due to rapid economic growth, as a result of economic liberalization program undertaken by the government since the mid-1980s and early 1990s, there was increased demand for air services. This was primarily due to the need for export promotion as a method for easing the balance of payments situation during this period. Exports were an important source of foreign exchange to pay for the import of oil, goods, and technology that were essential for modernization and industrialization. Since the government was constrained due to lack of resources, which limited its ability to expand the fleets of the two national carriers, it felt that deregulating the industry would encourage private investment and participation (Hooper, 1997; Raguraman, 1998). This would address the issue of capital and capacity shortage. Additionally, the two national carriers could tap into capital markets to raise funds required for capacity augmentation, thus easing the financial burden on the government. Another important part of the desire of the government to promote economic development was the desire to develop better air connectivity within the country Economic growth and development is also predicated on the existence of good air

13

See Interview of P.V. Narashimha Rao with The Observer. “Rao’s straight bat on a sticky wicket” July 7, 1991. 14 See Rajya Sabha, Committee on Transport and Tourism, Fourth Report 1993-94, October 1993.

40

transport links. The development of the Indian software industry, call centers, business process outsourcing, medical tourism, and other services, which are an integral part of the country’s economic growth story, are dependent on air transport links. In addition to this, a modern air transport infrastructure and adequate capacity and frequency is essential to attract foreign investment, particularly in high technology industries like electronics and automobile. Air transport links also play an important role in fulfilling economic policy and social objectives of the government (Hooper, 1997). The existence of air transport links facilitate trade and travel within the country. The desire to ensure the extension of air services to all parts of the country, even when they were not necessarily commercially viable, also played an important role in the decision to deregulate the airline industry. Trade and commerce can be stimulated in geographically remote areas through better air connectivity with the mainstream. Better air connectivity also brings people living in geographically remote areas closer to the national mainstream and thus facilitates national integration (Hooper, 1997). Finally, due to its geographical terrain, many areas in India are not easily accessible by surface transport and air transport links are a viable alternative in this situation. The government believed that encouraging the entry of private commercial operators would result in increased flight frequency and capacity to all corners of the country. As Madhavrao Scindia, the minister for civil aviation and tourism in the P.V. Narasimha Rao government claimed: “An element of competition in the provision of domestic air services is desirable...[T]his will lead to improvement in efficiency of air services.”15

In addition, the government believed that the adoption of more liberal bilateral exchange rights would encourage foreign airlines to expand operations to India, which would bring in foreign investment to the country. As such, the government has deregulated the airline industry keeping in mind social, strategic, economic, and geographic considerations. 15

See Interview of Madhavrao Scindia, “The Tuesday Interview: ‘Airlines are not my babies’. June 30, 1992. The Economic Times, 1992a.

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The impact of civil aviation on economic development is well documented. One study has estimated that the total direct economic impact of aviation on gross world output would increase from US$1.36 trillion in 1998 to US$1.7 trillion by 2010.16 Another study attributed 4.5% of the world’s Gross Domestic Product (GDP) to the air transport industry.17 In the case of India, it has been found that foreign exchange transactions worth US$22.5 billion are expected to be directly facilitated by civil aviation, with another US$96 billion indirectly through civil aviation services. About 40% of India’s exports and imports are carried by air (Ministry of Civil Aviation, 2003). The desire to develop the air transport infrastructure, particularly airports, within the country was another important factor in the deregulation of the airline industry in India. A modern air transport infrastructure and adequate capacity and frequency are also essential in attracting foreign investment. Airports are important centers for trade, commerce, and tourism and hence assist in the economic development of the country. India has over 400 airports but only about 60 of these are in active use. Indian airports are plagued by poor infrastructure, poor passenger amenities, inadequate ground handling systems, and outdated take-off and landing facilities. Congestion at major airports is a major concern. Since airports play a critical role in promoting trade and they are the first glimpse of India that a foreign tourist gets, the development and modernization of India’s airports is an essential requirement. Airports also facilitate air transport links between different parts of the country and connect different centers within India to the rest of the world.18 As mentioned earlier, a balance of payments crisis encouraged India to liberalize its economy. One method of addressing the balance of payments issue was to promote India as a tourist destination, thereby increasing the number of tourist arrivals, which would bring much-needed foreign exchange for the country. The tourism industry has had a significant impact on the economic development of India. During 2003-2004, the contribution of tourism to India’s GDP was 5.9%, while employment in tourism sector

16

See Air Transport Action Group, “The Economic Benefit of Air Transport”, 1998. See International Civil Aviation Organization (ICAO) brochure, “Economic Contribution of Civil Aviation: Ripples of Prosperity, 2000. 18 See Report of Committee on A Road Map for Civil Aviation Sector, 2003. Issued by Ministry of Civil Aviation. 17

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was 41.8 million (8.78% of total employment) (Ministry of Tourism, Government of India, 2008). The importance of tourism as a catalyst for economic growth was recognized belatedly during the mid-1980s.19 Historically, tourism had been accorded relatively low priority by the government. In 1981, India received only 1.28 million visitors (tourist arrivals), while the total world tourist arrivals was about 288.8 million. This meant that India’s share in world tourist arrivals was a mere 0.44%. Tourism receipts for the country for that year amounted to US $1.18 billion (a paltry 1.14% of the total world tourism receipts of US$104.3 billion). India was the 41st ranked tourism destination in the world (Raguraman, 1998). Things did not improve much by 1986 either as India’s share of world tourist arrivals remained static while its share of world tourism receipts fell to about 0.9%. The linkage between the necessity of having good air transport links and tourism is not hard to fathom. India’s key source markets for inbound tourism are France, Spain, US, China, Italy, UK and Germany. Their aggregate percentage share of total tourist arrivals in India is approximately 40%. India is a long-haul destination for several of these countries. As such, air services are an important component in tourism development. In 2001, 97% of all visitors to the country arrived by air. However, India’s restrictive aviation policies, which led to inadequate air transport services into the country, harmed the tourism industry. As the head of one of India’s first private domestic commercial carrier ModiLuft pointed out that, “Why tourism has not developed much in India when compared to a country like China is because of our air traffic policy.”20

Deregulating the airline industry was considered an important step in addressing this problem. The fleet constraints faced by the national carriers influenced the government to adopt a system of liberal traffic exchange rights, so that foreign carriers

19

See Tourism Policy of Government of India, 1990, issued by Secretary-General Lok Sabha, Parliament of India. 20 See Rajya Sabha, Committee on Transport and Tourism, Second Report 1993-94 on Government Policy on Private Air Taxi Operations, August 1993, p.15.

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would be able to bring tourists into the country. According to the Committee on Shortterm Strategy on Development of Tourism,

“We have to accord to tourism the priority status it deserves in national economic and planning system.”21

Finally, the importance of domestic tourism in India in the deregulation of the airline industry cannot be ignored. One of the initial steps in the deregulation of the airline industry was the permission granted to domestic air taxi operators to expand their capacity and services within the country. The lack of adequate services and frequency provided by the two national carriers to important tourist destinations within the country precipitated the relaxation of entry rules for air taxi operators and charter services. These operators played a significant role in transporting foreign tourists across different parts of the country and also encouraged domestic tourism. Therefore, in order to promote tourism (to increase foreign exchange reserves) deregulation of the airline industry was considered essential. It was believed that the deregulation of the airline industry would encourage foreign airlines to increase services to India thus increasing tourist arrivals. There is enormous potential to increase the number of tourist arrivals in the country. Trade and travel across the world is increasing and India desires to increase its share of tourist arrivals and tourism receipts. This represented an important motivation for the deregulation of the airline industry.

(b) Provision of Air Services The increasing demand for air services in India may have been another reason for the deregulation of the airline industry. Part of the strategy involved relaxing entry procedures for private domestic commercial carriers. This is because the two national carriers by themselves were unable to cater to this increased demand. As Madhavrao Scindia claimed:

21

See Report of the Committee on Short-term Strategy for Development of Tourism, 1985, issued by Department of Tourism, p.61.

44

“It is our duty to see that those who wish to step in when Indian Airlines fails get a fair chance to provide a good service.”22

The country has seen rapid growth in the number of domestic and international passengers. From 1996-97 to 2006-07, the number of domestic passengers increased from 12 million to 27.87 million, while the number of international passengers over the same period of time increased from 10.89 million to 19.87 million. The total number of passengers during this time thus increased from 22.89 million to 47.74 million (Figure 1).

Figure 1: Growth in India’s air traffic (in millions), 1996-2007.

Passengers (millions)

60 50 40 30 20 10

Domestic

International

20 07

20 06

20 05

20 04

20 03

20 02

20 01

20 00

19 99

19 98

19 97

19 96

0

Total

Source: Airports Authority of India, Policy on Airport Infrastructure, 2008

The number of air passengers is expected to increase over the next decade as well. Table 6 shows the expected growth in India’s air traffic from 2007 to 2015. In order to

22

See Interview of Madhavrao Scindia, ‘Scindia’. June 30, 1992. The Economic Times, 1992b

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cater to the increased demand for air services, the government may have to deregulate the airline industry.

Table 6: Growth in India’s air traffic (in millions), 2007-2017.

Year

Domestic Passengers

International Passengers

2007-2008

29.82

20.96

2008-2009

31.91

22.16

2009-2010

34.14

23.33

2010-2011

36.53

24.61

2011-2012

39.09

25.97

2012-2013

41.43

27.24

2013-2014

43.92

28.57

2014-2015

46.56

29.97

2015-2016

49.35

31.44

2016-2017

52.31

32.98

Source: Airports Authority of India, Policy on Airport Infrastructure, 2008.

One needs only to look at the performance of Indian Airlines and Air India in recent times to understand the government’s interest in deregulating the airline industry. As is clear from the preceding pages, the perceived inefficiency of the two national carriers became as good a reason as any for deregulation of the airline industry. Air India had lost market share and was stagnating and unable to bring in required foreign exchange. Indian Airlines was incurring losses beginning in the late-1980s that were proving unsustainable in the long-run. For a country that was being plagued by a balance of payments crisis at that time, such a situation proved difficult to manage. The solution was to encourage more competition in the airline industry so that Indian Airlines and Air India might operate more efficiently. According to Madhavrao Scindia,

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“The idea is to see competition in the air…our policy is to encourage real competition.”23

The government recognized that fleet augmentation, which was required to retake market share and increase services, was not possible given its limited financial resources. It was felt that private participation and deregulating the airline industry was the most suitable solution. In this situation, it was not alone as several states in the AsiaPacific region faced similar problems and decided to deregulate and liberalize their air transport services sector (Bowen & Leinbach, 1995). The loss in terms of market share for Indian carriers prompted a re-evaluation of the regulatory policy that was adopted by the government in 1953 (Hooper, 1997, Bhatt, 1997). Air India did not receive adequate support from the government in terms of investing in fleet augmentation, and its efficiency and performance suffered. Lack of equipment led to inadequate services prompting passengers to prefer foreign airlines. Air India’s loss of market share had a debilitating effect on its future growth prospects and profits. The loss in terms of foreign exchange was also substantial (Raguraman, 1998). In place of the 50% market share it was entitled to, by 1990 its market share had dropped to less than 30% vis-à-vis the foreign carriers. It was recognized the further drop in market share would ultimately make the airline unviable and lead to its collapse. It was also felt that state ownership had reduced the efficiency of Indian Airlines and Air India. These airlines, which had been under state ownership, were protected entities as the government subsidized their operation. The latter made sure they remained afloat, despite incurring losses. Unlike Indian Airlines and Air India, most of the foreign carriers did not depend solely on the government for raising funds and were able to tap equity funds in capital markets. In addition, they enjoyed managerial autonomy, which facilitated swift decision-making in response to the ever-changing aviation industry. As a result, it was felt that deregulation of the airline industry was a necessary step to ease the economic burden on the government. Strict regulation of the airline industry was now a less favored option. As the Planning Commission pointed out in its report in December 1989, 23

Ibid.

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“Fifty years of experience in public ownership and government regulation of entry, fares and freights and capacity…cast doubts on the validity of some of the arguments advanced for regulation/public ownership.”24

(c) International Trends The deregulation of the US civil aviation industry in 1978 and subsequent deregulation of the airline industries in the Australia, Canada, UK, Japan and several other western European countries may have also affected the Indian airline industry in several ways (Hooper, 1997). Due to deregulation, there was increased competition in the air transport sector within these countries. This competition had a positive impact on the performance of carriers in these countries. Sustained competition increased efficiency standards of these airlines and led to consolidation of the industry (Juan, 1997). American and European carriers began to dominate the world aviation market even more strongly. This fact was recognized by the government. According to Madhavrao Scindia,

“The trends in air transport are towards global operations and there is a coming together of the giant airlines for economies in operation as well as for larger economies of scale…To my mind Air India is facing a challenge, it is not facing a crisis.”25

However, others have expressed concern regarding this state of affairs. As Air India’s Chief Managing Director (1991-1994), Y.C. Deveshwar claimed, “We are going to be under tremendous pressures…it will be very very difficult for us to compete with the overwhelmingly more powerful airlines which are financially stronger.”26

The deregulation of the airline industries in these countries symbolized the general trend around the world which was a move away from strict regulatory regimes. 24

See “Air Traffic Committee Report”, Planning Commission, Government of India, December 1989. Speech delivered by Madhavrao Scindia, Union Minister for Civil Aviation and Tourism (Mumbai: October 15, 1992), cited in Baldev Raj Nayar’s “The State and International Aviation in India: Performance and Policy on the Eve of Aviation Globalization”. New Delhi: Manohar, 1994. 26 Speech delivered by Y.C. Deveshwar, Chairman and Managing Director, Air India (Mumbai: October 15, 1992) cited in Baldev Raj Nayar’s, “The State and International Aviation in India: Performance and Policy on the Eve of Aviation Globalization”. New Delhi: Manohar, 1994. 25

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As a result of deregulation, fares were lower and airline operations more efficient in the US. Erstwhile government-controlled airlines like British Airways and Japan Air Lines (JAL) had undergone privatization and notched up impressive profits (Bhatt, 1994). The government felt that similar benefits would accrue to India once it deregulated its airline industry. As such, it is hypothesized that the desire to promote economic development (including the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism and attracting foreign investment), desire to improve air services (increased demand for air services, poor performance of the national carriers, and desire to encourage competition) and the international trend towards liberalized airline competition may have motivated the government to deregulate the Indian airline industry.

Deregulation of the Airline Industry in India The need of the Indian airline industry to evolve toward deregulation became increasingly recognized among several quarters beginning in the mid-1980s (Hooper, 1997). A variety of committees constituted to look into the functioning of the civil aviation and other allied industries recommended moves toward deregulation because of its perceived benefits. The Department of Tourism, Government of India, recognized the importance of civil aviation to the country’s tourism industry. In 1985, a high-level committee in its report asked the government to examine issues like policies for air charters, air fares for charters, visas for tourists, and improving airport infrastructure.27 The government-organized the historic “Seminar on Civil Aviation at the Turn of the Century” in New Delhi on January 23-24, 1986, which stressed the need for new technology for civil aviation, the need more improvements to airport infrastructure, and the need for new aircraft for greater efficiency, performance and safety in the airline industry. This was one of the first attempts to analyze the civil aviation sector in light of the future needs of the industry and the country.28 27

Report of Committee on Tourism on short-term strategy for development of Tourism, 1985. Issued by Department of Tourism. 28 “Civil Aviation at the turn of the Century”, seminar proceedings, January 23-24, 1986, New Delhi, published by Indian Airlines.

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In 1986, the Report of the Planning Group on “Civil Aviation at the Turn of the Century” recommended the establishment of air taxi services in order to promote tourism. The Planning Commission Report on Tourism, 1988, outlined the importance of civil aviation to tourism promotion as the vast majority of international tourists enter and leave the country by air. It argued that Air India alone was unable to bring adequate number of tourists to India and recommended that the government adopt a liberal aviation policy and allow foreign airlines to meet the projected demand of travel to and from India.29 By mid-1989, in response to some of these recommendations, the government had approved the air taxi scheme. However, these air taxi operators were still subject to several restrictions regarding aircraft capacity, flight routes, airports, flight schedules, importing aircraft, foreign exchange, and ownership. The policy therefore did not pay much dividend. Recognizing the situation, the government removed most of the above restrictions in April 1990. Later, the government also withdrew the ban on Indian private commercial operators to import aircraft from abroad. The Planning Commission (Transport Division), Government of India, was one of the earliest proponents of the need for deregulation of air transport services. In a study conducted in 1988-89 entitled “International Experiences on Deregulation: Lessons for India”, it accepted the argument that regulatory regimes did not lead to efficiency. 30 It recommended deregulation in a phased manner in India. It argued that the priority of the government should be to eliminate the monopoly granted to Indian Airlines and Air India. In effect, it called for the repeal of the Air Corporations Act, 1953. It claimed that while the US experience in deregulation could not be directly applied to the Indian case because of the difference in ownership and regulatory regime, the experience of countries like Australia, Canada, and those situated in Western Europe were more relevant and could be used as a road-map for deregulation in India. All this culminated in the constitution of the historic Committee on Transport and Tourism of the Rajya Sabha (Upper House of the National Assembly). In its report in 1993-94, the Committee recommended, for the first time, a new bill for repealing the Air Corporations Act, 1953 and the conversion of Air India and Indian Airlines from 29

Report of National Committee on Tourism, Planning Commission, New Delhi, May 1988. Air Traffic Committee Report of Planning Commission, Government of India, December 1989, entitled “International Experiences on Deregulation: Lessons for India”. 30

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corporations to public limited companies.31 The Committee recognized that even though private investment in the airline industry had been allowed, the need of the hour was to remove restrictions on private participation in the domestic scheduled air services, where Indian Airlines enjoyed a monopoly. The Committee recognized that civil aviation industry could not remain immune to the broader economic liberalization agenda being pursued by the government at that time. It also recognized that government support to national carriers was proving to be a drain on its resources and these carriers should be allowed to raise equity from the capital markets in order to raise funds and improve services. As such, the government accepted the recommendations of the Committee of Transport and Tourism. As a consequence it repealed the Air Corporations Act, 1953 and replaced it with the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994. Two sections of this act, Sec.3 and Sec.11 are particularly relevant.32 Sec.3 outlined that Air India and Indian Airlines cease to be corporations and henceforth will be public limited companies. Just as importantly, according to Sec.11 of the new act the Air Corporations Act, 1953 stood repealed:

•

On such date as the Central Government may, by notification in the Official Gazette, appoint, there shall be transferred to, and vest in,- (a) Indian Airlines Limited, the undertaking of Indian Airlines; (b) Air India Limited, the undertaking of Air India.(Sec.3)

•

On the appointed day, the Air Corporations Act, 1953 shall stand repealed. The corporations shall, with the repeal of the Air Corporations Act, 1953, cease to exist (Sec. 11)

As previously stated Chapter IV, Section 18 (1) of the Air Corporations Act, 1953, which outlined the monopoly enjoyed by Indian Airlines in the domestic scheduled air transport services, was repealed. The repeal of the Air Corporations Act, 1953 ended 31

Rajya Sabha, Committee on Transport and Tourism, 1993-94, Fourth Report. Air Corporations (Transfer of Undertakings and Repeal) Act, 1994. Directorate General of Civil Aviation, 2007b 32

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four decades of regulation and nationalization of the airline industry. Air India and Indian Airlines were no longer government-owned monopolies. The two air corporations had been converted into joint-stock companies, which would facilitate increased equity investment by private sector. With regard to domestic scheduled services, the new act permitted the entry of private commercial operators and removed restrictions on flight capacity, frequency, fares, and services. Indian Airlines had been subjected to government supervision and seemed to be unable to carry out its stated functions as evident from the meager profits during the last four decades and losses that were piling up during the early 1990s. With the enactment of the new act, it was hoped that competition among airlines would improve services in the domestic sector and also galvanize Indian Airlines by exposing it to market forces. Thus, deregulation of the airline industry cannot be seen in isolation. They are in tune with a broader shift of the government from an inward-oriented economy to a more liberalized economy. In addition, they were influenced by international events like the deregulation of the airline industry in the developed world.

(a) The Rise of Private Commercial Operators With the adoption of the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994, the regulated domestic air services were opened up for private participation. Since, then the policy regime has evolved. Some of the key features of the current policy pertaining to domestic air transport that are particularly relevant for private commercial operators are given as under:

•

Private sector is allowed to operate schedule air services.

•

The Aircraft Acquisition Committee (AAC) considers proposals for grant of permission to operate scheduled/non-scheduled air transport services. It was responsible for issuing No-Objection Certificates (NOCs), import permission for aircraft and issue of permit for scheduled/non-scheduled air services.

•

The operator should be a citizen of India or a company or a body corporate provided that:

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•

It is registered and has its principal place of business within India;

•

The Chairman and at least two-thirds of its Directors are citizens of India; and

•

Its substantial ownership and effective control is vested in Indian nationals.

•

Scheduled operators were required to follow route dispersal guidelines set by the government. The purpose of this clause was to ensure the extension of air services to all parts of the country even when they were not necessarily commercially viable. Three Categories were set up. Category-I consisted of the most commercially viable routes. Categories-II and III included the less commercially viable routes. The policy dictated that: •

The operator will deploy on routes in Category-II at least 10% of the capacity he deploys on routes in Category-I and of the capacity thus required to be deployed on Category-II routes, at least 10% would be deployed on service or segments thereof operated exclusively within Category-II

•

The operator will deploy on routes in Category-III, at least 50% of the capacity he deploys on routes in Category-I.

•

With regard to entry regulations, operators were required to have: •

A fleet of minimum five aircraft of all-up-weight of aircraft more than 5,700 kgs. (12,600 pounds approx.) each to be acquired in one years' time from the date of securing operators' permit.

•

Not less than Rs.300 million subscribed equity capital in respect of operators having aircraft or all-up-weight exceeding 40,000 kgs. (approx. 88,000 pounds) and not less than Rs.100 million for operators having aircraft of all-up-weight not exceeding 40,000 kgs.

•

•

No less than three sets of flight crew and cabin crew per aircraft

Fares were left to be determined by market forces

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•

Private commercial operators were given choice regarding aircraft size and type

•

With regard to safety and security regulations, private commercial operators had to comply with the requirements outlined by the Directorate General of Civil Aviation and the Bureau of Civil Aviation Security (BCAS).

In July 2003, the government constituted a committee to prepare a roadmap for the civil aviation sector, which would provide the basis for a new civil aviation policy.33 The Report of the Committee on a Road Map for the Civil Aviation Sector claimed that: “Thanks to liberalization, between 1994-95 and 2001-02, the domestic air transport industry has registered impressive growth on several parameters, including the number of aircraft-kms flown (by 155%) and passenger-kms flown (by 76%)…More importantly, during 1994-95 to 2001-02, the sector registered substantially higher Compounded Annual Growth Rate (CAGR) in several key parameters, as compared to the CAGR of aircraft flown from 1% to 14.3%, whereas the CAGR of passengers-kms flown increased from 0.7 to 8.4%.”

The relaxed regulations allowed for entry of several private commercial operators into the domestic scheduled air services during the mid-1990s. These included airlines like Damania Airways, East West Airlines, Jet Airways, Sahara Airlines (later Air Sahara), Modiluft, and NEPC Airlines. However, by 1997-98, only Jet Airways and Air Sahara remained in the fray with regular scheduled operations. By 1997, Damania Airways, East West Airlines, Modiluft, and NEPC Airlines had folded due to a variety of reasons (Hooper, 1997: 117-118). A report on the online news portal Rediff on the Net analyzed some of the factors that led to the exit of these airlines from the Indian market.34 Firstly, most of the entrants in the Indian market did not have a good capital base. Most airlines did not have enough capital to invest in aircraft purchase, or set up maintenance and training facilities. For 33

See Report of the Naresh Chandra Committee on A Road Map for Civil Aviation Sector, 2003. Issued by Ministry of Civil Aviation, Government of India.

34

See “Why are India's private airlines in such bad shape?”, Rediff on the Net Business News http://www.rediff.com/business/jan/28crash.htm, 28 January 1997.

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example, in the case of Modiluft (set up by agreement between the Modi Group of India and Lufthansa), the leasing of planes, maintenance work, and pilots were contracted from Lufthansa. All this required huge amount of expenditure on a constant basis. However, the returns in airfare were not enough to cover this expenditure. The result was losses all around for Modiluft. Ultimately, Lufthansa withdrew from this loss-making enterprise causing Modiluft to fold in 1997. Another reason for the collapse of so many airlines had to do with the nature of policies instituted by the government.35 As has been pointed out, the route dispersal guidelines required private commercial operators to run services on Category II and III routes, in the interests of ensuring air connectivity to all parts of the country, even when they were financially unviable. For many of these start-ups, there was just not enough capital to absorb these losses and continue to be viable. Finally, many of the airlines lacked professional leadership and expertise.36 Modiluft was headed by an industrialist whose background was in threads and fibers; Damania Airways’ chairman was in the poultry business before his venture into aviation; the head of NEPC Airlines’ became involved in financial irregularities and defaulted on taxes; East West Airlines, the country’s first private commercial scheduled airline established in the aftermath of deregulation, came under suspicion of being funded by Mumbai’s organized crime syndicates through illegal transactions (hawala) from the Middle East. The worst fears of the government seemed to have come true when the head of the airlines was killed in Mumbai in 1995, allegedly by one of Mumbai’s organized crime syndicates. Thereafter, the airlines quickly folded. However, Jet Airways, which began operations with four aircrafts, twenty-four daily flights and twelve destinations in 1993-94, grew to have forty-one aircrafts, twohundred fifty daily flights and forty-one destinations by February 2003. Its market share was an estimated 46% in 2002-03.37 The main reason for this was its two foreign partners Kuwait Airways and Gulf Air, which funded its expansion and helped tide over difficult times. Since then, Jet Airways has become one of only two private commercial operators 35

Ibid. Ibid. 37 Report of the Naresh Chandra Committee on A Road Map for Civil Aviation Sector, 2003. Issued by Ministry of Civil Aviation. 36

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that have been allowed to launch international services (the other being Air Sahara, now owned by Jet Airways, and operating under the name JetLite). Today, Jet Airways flies to 20 international destinations: Abu Dhabi, Bahrain, Bangkok, Brussels, Colombo, Dhaka, Doha, Hong Kong, Kathmandu, Kuala Lumpur, Kuwait City, London, Los Angeles, Muscat, Newark, New York, San Francisco, Shanghai, Singapore, and Toronto. The first phase of deregulation saw intense competition where several players “crash-landed” due to financial and management issues. After the demise of private commercial operators like Damania Aiways, East West Airlines, Modiluft, and NEPC Airlines during the late 1990s, it was not until 2003 that several new airlines emerged and began operations. However, these airlines had an entirely different business model compared to the previous carriers. These were the low-cost carriers (LCCs).

(b) The Rise of Low-cost Carriers After making its mark in the United States and Europe, the LCC concept arrived in India in 2003 with the first flight of budget airline Air Deccan. In the aftermath of the attacks of 9/11, the SARS epidemic, and a general worldwide economic slowdown traditional airlines saw a drop in their profit margins and passenger volume, a downturn that also hit India’s carriers. Entering the market during this period, the budget airlines boosted their operations, turning the industry’s crisis to their advantage. Besides Air Deccan, the demand for competitive fares was filled by other LCCs like SpiceJet Airlines, GoAir, IndiGo Airlines, and Air India Express, particularly on short-haul routes. The explosion in the number of carriers was spurred by the 25% per year increase in domestic air travel, fuelled in turn by the country’s economic growth. The number of airline passengers in India rose from 12.8 million to 19.4 million annually in just three years, through to 2004. The market share of budget airlines, meanwhile, has increased by more than 30% since 2003, and the Australia-based Centre for Asia Pacific Aviation (CAPA) projects the figure to be 70% by 2010.38 By 2006, Air Deccan had already cornered about 21% of the domestic air-travel market, bringing it almost at par with the state-owned carrier Indian (previously Indian Airlines), which until the early1990s enjoyed a monopoly over the Indian skies. 38

The Financial Express, 2007. Low-cost carrier market share to touch 70% by 2010. August 8.

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Table 7: Market share of Airlines offering Domestic Scheduled Air Services in India, 2006

Airlines

First

Second

Third

Fourth

Average

Quarter

Quarter

Quarter

Quarter

Yearly

(Jan-Mar)

(Apr-Jun)

(Jul-Sep)

(Oct-Dec)

Jet Airways

34.9

33.3

30.4

27

31.2

Indian Airlines

23.9

22

21.6

18.9

21.5

Air Deccan (LCC)

15.2

19.1

19.3

19.1

18.3

Air Sahara

9.7

7.8

8.8

8.8

8.8

Kingfisher Airlines

8.3

7.7

8.8

9.7

8.7

SpiceJet Airlines

6.0

6.9

6.9

7.5

6.9

GoAir (LCC)

1.6

2.7

2.5

4.1

2.8

IndiGo Airlines

-

-

0.9

3.7

1.3

Paramount Airways

0.3

0.5

0.8

1.1

0.7

Low-cost Carriers

22.8

28.7

29.6

34.4

28.9

(LCC)

(LCC)

(LCC)

Source: Directorate General of Civil Aviation, Government of India, 2006a

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The domestic airline industry has displayed impressive growth in the postderegulatory period. Particularly noteworthy has been the performance of the private commercial operators, when compared to Indian Airlines. The LCCs had garnered an increasing share of the market in 2006 (See Table 7). Budget airlines found the Indian market attractive because ticket prices had traditionally been prohibitive for most travelers. In addition, Indian LCCs had been able to reduce travel time by providing better connectivity – in the form of more flights, more destinations and shorter turnaround times. Passengers flying these airlines generally comprised either public- or private-sector professionals, whose employers preferred that they travel by air for the time saved over a train ride or a bus/car ride over distances exceeding 500 miles. As airfares remain competitive and more destinations are offered, this trend will undoubtedly continue.

Table 8: Number of Passengers traveling (in millions) during 2006, First QuarterFourth Quarter

Quarters

Number of Passengers

Increase (in %)

traveling (in millions) First Quarter

7.246

-

Second Quarter

8.075

11.44

Third Quarter

7.618

(-) 5.66

Fourth Quarter

9.233

21.20

Total

32.172

Source: Directorate General of Civil Aviation, Government of India, 2006b.

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The domestic air transport sector seems to be headed towards a consolidation phase. On April 12, 2007, Jet Airways bought out its Air Sahara for US$ 340 million. The deal is expected to increase Jet Airways’ market share. Jet Airways has announced plans to restructure Air Sahara operations and renamed the latter JetLite. Further, Kingfisher Airlines acquired majority stake in India’s premier LCC, Air Deccan, in June 2007 and Air India and Indian Airlines merged in July 2007. As Table 8 demonstrates, there has been a rapid increase in the domestic air traffic. Notwithstanding the fall in passengers traveling during the Third Quarter, i.e., the months of July-October (the monsoon months during which there are very heavy seasonal rains throughout India and most people do not travel during this period), the domestic air traffic has scaled new heights. This increase can be attributed to a combination of rising incomes due to economic liberalization, increased capacity on domestic routes due to private commercial operators (a result of deregulation), and lower airfares due to competition (also a result of deregulation). Currently, India’s six private commercial operators have placed on order a combined total of over 400 aircrafts on order for purchase in light of the expanding domestic and international market. Praful Patel, the current minister for civil aviation, in an address at the Economic Editors’ Conference in New Delhi, India on November 19, 2005, has claimed that the Indian aviation sector would require investments to the tune of US$50 billion in the next ten years, mainly in the form of airport infrastructure upgrade and fleet acquisition by carriers. He claimed that, "The aviation sector is one of the highest investment sectors in the country. The monies will be required to fund the fleet acquisition proposal of the airlines, setting of Maintenance, Repair and Overhaul and other facilities such as pilot training institutes."39

In addition, he claimed that from 2005-10, the sector would expect to receive about US$30 billion in investments from the private sector as well as the government. He forecasted that the domestic aviation sector was expected to grow at 25-30% for 2005-06, and at least 20% annually for the next five years. 39

See Work on Modernization of Chennai and Kolkata Airports Next Year. The Hindu, 19 November 2005.

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Therefore, it may be concluded that deregulation has served to increase passenger traffic, reduced airfares, increased competition, and challenged Indian Airlines. While the exit of several operators during the middle part of the previous decade seemed to imply that deregulation may not bring with it the desired benefits, the experience since 2003, with the virtual explosion in the number of airlines that are more profitable and have more capital base, suggests that there were indeed some benefits associated with deregulation. With increasing competition and the advent of LCCs, the ultimate winner appears to be the consumer.

(c) Performance of Indian Airlines and Air India post-deregulation Although, the Air Corporations Act, 1953 monopolized domestic scheduled services for Indian Airlines, the government had by mid-1989 eased regulations for air taxi operators so that they could ply non-scheduled services within the country. From 1991-92 to 1992-93, traffic carried by air taxi operators increased from 41,916 to 725,812 passengers (an increase of 1,632%), while that of Indian Airlines declined over the same period from 8.32 million to 7.27 million (a loss of 14.5%) (Bhatt, 1997: 194). Already smarting under this blow, the passage of the Air Corporations Act (Transfer of Undertakings and Repeal) Act, 1994, which repealed the previous act of 1953 and withdrew the monopoly granted to Indian Airlines, worsened the situation for the airline. The immediate result of this act was the entry of several private commercial operators like Jet Airways, Air Sahara, Modiluft, and East West Airlines in the domestic scheduled air services sector. These airlines soon began challenging Indian Airlines’ status as the dominant carrier in the domestic sector (Hooper, 1997; O’Connell & Williams, 2006). Due to better service and on-time performance, these airlines came to be seen as a better alternative to Indian Airlines by the consumer. The Parliamentary Standing Committee on Transport and Tourism found in 1993 that by the middle of that year Indian Airlines had lost about 140 pilots and engineers, including 68 flight commanders and 37 first officers, to these private commercial operators who were enticing them with higher pay packets.40 On the profit-making routes, the market share of

40

See Rajya Sabha, Committee on Transport and Tourism report entitled “Second Report, 1993-94 on Government Policy on Private Air Taxi Operations”. August, 1993.

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Indian Airlines dropped to between 45-55%. The year after the repeal of the Air Corporations Act, 1953, and the entry of private commercial operators, i.e., 1994-95, Indian Airlines reported a loss of US$57.19 million. However, it must be pointed out that such a situation did not persist for long. Stung by the competition, Indian Airlines effected several changes to its management structure and functioning (Bhatt, 1997). It began to address the lack of quality service and punctuality that had made passengers prefer flying with the private commercial operators. In addition, it recognized that frequent management-worker conflicts in Indian Airlines, harmed the relationship shared between different categories of staff and ultimately impacted the services and performance of the airline. Therefore, there was a need to manage conflict in a more effective manner (Bhatt, 1997). There was also recognition on the part of the government that the authority of the management over the functioning of Indian Airlines had been usurped by it and this had led to political and bureaucratic interference and had affected the airline’s performance. It recognized the need greater managerial autonomy. Some of the steps taken by Indian Airlines, in the wake of the deregulation period have brought rich dividends. After the initial loss incurred in the period of 1994-95, the airline dished out profits continuously for the next five years (Table 9).

Table 9: Profits for Indian Airlines, 1995-96 to 1999-2000, in US$ million

Year

Profits

1995-96

46.59

1996-97

38.11

1997-98

67.24

1998-99

70.05

1999-2000

45.41

Source: Ministry of Civil Aviation, Government of India, 2008f. Annual Report (various years)

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This was in marked contrast to the losses it incurred over three consecutive years from 1992-93 to 1994-95. Considering that the profits were earned in the face of increasing competition in the domestic scheduled air services sector, the performance is especially laudatory. However, one must also not forget that during this period several of the private commercial operators went out of business and therefore Indian Airlines had a less difficult time managing the competition. Turning our attention to Air India, we find that deregulation has not brought with it any immediate benefits for Air India. However, this is not surprising considering the deregulation of Indian skies would not affect Air India directly since it never functioned under a monopolistic regime unlike Indian Airlines. Air India was always in competition with foreign airlines ever since its inception. However, the deregulation of domestic scheduled services did have some adverse impact on Air India. Specifically, the private commercial operators had begun to spread roots in different parts of India and offer services to several new destinations. They began to partner foreign airlines feeding them traffic from all over India, and receiving the foreign airlines’ traffic connecting to the secondary cities within India. This led to consequent loss of market share for Air India. Later, some of the domestic private commercial operators themselves started launching international operations after receiving permission from the government (Hooper, 1997). This led to further loss of market share for Air India. Air India was faced with several challenges during the post-deregulatory period. Chief among them was the need to replace its ageing fleet and the search for new routes (Bhatt, 1997). Air India was required to replace its ageing Boeing 747 fleet. For this purpose, it bought two new Boeing 747-400s in 1995. However, the process of induction into the fleet was slow. Some other steps taken by Air India included financial restructuring of the airline. In 1995, in a move to generate resources for fleet expansion, the government nearly doubled the equity base of Air India from US$22.57 million to US$43.71 million by the conversion of government’s US$21.14 million loan capital into equity. Another step, aimed at raising additional loans for expansion, involved the conversion of Air India’s reserves of US$314.28 million into equity. For the purpose of

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fleet expansion, the government provided a grant of US$825.55 million (Bhatt, 1997: 136). The search for new routes became imperative for Air India as its market share had plummeted in recent years. Air India needed to initiate new operations to Europe, North America (particularly US), Asia-Pacific, and Australia as the Middle East sector was not enough to assure Air India profits every year. According to projections by leading players in the aviation industry, the average rate of growth in air traffic in the Asia-Pacific region was expected to be higher than any other region by the year 2010. Air India wanted to be part of this air traffic boom and therefore looked to extend operations in several countries in this region. However, despite Air India taking steps to ensure that it remained competitive, the airline began to flounder during the 1990s. As was pointed out in pervious sections, state ownership of Air India and lack of managerial autonomy crippled Air India’s ability to renew and expand its fleet. Inadequate capacity and ageing aircraft led to limited and poor service and consequently loss of market share all through the 1980s. The full impact of this situation revealed itself during the 1990s. During the period of 1960-1990, Air India had returned losses for only six of the thirty years. Compared to this, between a seven-year period from 1995-96 to 2001-02, it returned losses in five years (Table 10).

Table 10: Financial Performance of Air India, 1995-96 to 2001-02, in US$ million

Year

Profits/Loss

1995-96

(-)65.97

1996-97

(-)116.23

1997-98

(-)50.03

1998-99

(-)1.09

1999-2000

17.28

2000-01

0.07

2001-02

(-)11.48

Source: Ministry of Civil Aviation, Government of India, 2008f. Annual Report (various years)

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One of the steps considered by the government to make Indian Airlines and Air India more competitive in the post-regulatory period involved the issue of privatization. However, privatization was a difficult option for several reasons. First, until 1994 Air India was a profitable enterprise and privatizing a profitable enterprise was never going to be easy. There would be little justification for privatization in such a situation. Second, privatization was considered anathema by workers of these two airlines as they feared that take-over of the airlines by private entities would lead to loss of jobs and restructuring of compensation packages. They feared that Air India and Indian Airlines would eventually be taken over by foreign airlines/multinationals, who would preside over the demise of these airlines, thus leaving India vulnerable to the machinations of foreign airlines. Labor unions in India are particularly powerful with extensive political backing. Privatization would have required approval of Parliament, which was never going to be easy during a period of minority and coalition governments. Successive governments realized the difficulties associated with privatization and decided against adopting any immediate plans for privatization of the airline (Nayar, 1994). Another step contemplated by the government for reviving the fortunes of Indian Airlines and Air India involved the proposal of merger of the two airlines. This idea was first mooted during the early years of the post-deregulatory period. The logic behind the idea was to cut down on costs for both airlines. In particular, since Indian Airlines was incurring huge losses during the late-1980s and early-1990s, it was expected that the merger would address these issues. It was also expected that maintenance, ground operations, the use of landing slots and parking rights, etc. would become more costeffective for the merged airline. However, the process proved to be extremely slow and cumbersome. It was not easy to merge two huge companies. The status and future of the management, pilots, flight crew, flight engineers, ground staff, etc., of both the airlines in a new company was unclear. Staff rationalization, a key element in the success of the new entity, was a difficult process to undertake. There were fears as to the viability of the project. In addition, there was no guarantee that the new company would rid Indian Airlines and Air India of its ills. Managing each company individually had proved difficult so doubts persisted regarding the functioning of a merged entity.

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More recently, the government renewed efforts towards merger of Air India and Indian Airlines. It gave the green light for the merger of Air India and Indian Airlines in 2006.41 The formal merger took place on August 24, 2007. The new airline was called Air India. Air India has been in the process of renovating its existing fleet with new interiors, seats, and in-flight entertainment. Subsequently, issues relating to management structure, workers, infrastructure, etc. were taken up as the new airline. Just as importantly, Air India had begun the process of inducting new aircrafts into their fleet. As was pointed out before, lack of adequate capacity was one of the primary reasons for loss of market share and losses. With the new acquisition plan, the merged airline is expected to come out of the road in the near future. Today, the consolidated Air India flies to 89 destinations (40 international and 49 domestic) (Air India, 2008). It has signed code-share agreements with twelve airlines: Air France, Air Mauritius, Aeroflot, Aerosvit, Air Astana, Austrian Airlines, British Airways, Cathay Pacific, Continental Airlines, Emirates Airlines, Kuwait Airways, KLM Royal Dutch Airlines, Kyrgyzstan Airlines, Lufthansa, Malaysia Airlines, Royal Jordanian Airlines, Singapore Airlines, Swiss International Airlines, Thai Airways International, Turkish Airlines, and Uzbekistan Airlines. Air India is also in the process of capacity augmentation (Air India, 2008). It will be inducted into the Star Alliance, the largest airline alliance in the world, in mid-2009. The airline currently operates 119 aircrafts and plans to induct 63 more aircrafts over the next five to ten years. The newly inducted aircraft would allow Air India to mount new operations on long-haul routes to North America, Europe, Australia, and the Far East. In the US, it would start non-stop operations for the first time to San Francisco and later possibly to Houston, Dallas, and Washington D.C. (Air India, 2008) Both Indian Airlines and Air India have had to adapt to the demands of deregulation. Both airlines have changed their management structures, tried to harmonize management-staff relationship, and merged in order to improve services. Although, privatization of Indian Airlines and Air India was not an option given India’s political climate, the issue of merger of the two airlines raises the hope that a combined entity would be able to recover lost market share and return profits. Most importantly, a positive 41

See Air India, Indian to merge soon. The Hindu, 9 June 2006

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decision regarding aircraft acquisition has finally been taken by the government, facilitating the initiation of new routes. As such, there is the possibility of Air India increasing its market share. While Air India has encountered certain difficulties during the post-deregulatory period, the airline has also made some progress in making itself more competitive.

(d) Bilateralism and Open Skies It would be wrong to assume that deregulation of the airline industry and its effects were confined only to the domestic air transport services sector in India. Deregulation has also had far-reaching impactions on the issue of aviation bilateralism, as it pertained to India. This issue will be explored in this section. In recent years, air traffic to and from India had been among the fastest growing in the world. The number of passengers traveling by air within the country grew by 46.5% during May 2006 (5.85 million) as compared to the same period in the previous year (4 million). Similarly, the international air passenger traffic handled by Indian airports during May 2006 registered a growth of 15.7% to reach 1.99 million passengers up from 1.72 million during the same period in the previous year (Phadnis, 2006). Keeping pace with the demands and expectations required India to modernize and develop its civil aviation sector through measures that included liberalizing international air services. As pointed out earlier, international aviation is regulated by the system bilateral agreements that determine issues like market access and pricing. The Chicago Convention on International Civil Aviation, 1944 laid the basis for the aviation regime. Article 1 of the Convention recognized the absolute sovereignty of the state over its airspace and its right to regulate the operation of scheduled airlines over, from, and into its territory.42 Further, Article 6 of the Convention pertaining to scheduled air services restricted the operation of scheduled international air services over or into another country’s territory, unless that country authorized such a movement through bilateral or multilateral agreement.

42

Chicago Convention on International Civil Aviation, ICAO, Doc. 7300/6, 1980.

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The other agreement that formed the basis of international aviation services was the Bermuda Agreement of 1946 between the US and UK. In addition to recognizing, the principles of the Chicago Convention with regard to sovereignty of air space, it also established new rules regarding the provision of fair and equal opportunity for designated airlines to compete, including monitoring the frequency and capacity of designated airlines, so as not to affect the exercise of rights granted to other. In formal terms, each country’s airline had the right to 50% of the international traffic to and from the country. Upon these two treaties rest the regime of bilateralism. Over the last half a century, in an attempt to regulate the flow of traffic to and from the country, India has signed 100 bilateral aviation agreements (Ministry of Civil Aviation, Government of India, 2006). Such agreements specified fixed number of flights to fixed number of destinations on the basis of reciprocation. India has been an avid supporter of bilateralism. It felt that this mechanism was useful to ensure the protection of Air India against the much larger foreign carriers. However, as is clear from previous discussions, the bilateral regime did not do much to protect Air India because it kept losing market share from 1960-90. Structural problems in the management and operations of Air India ensured that even with the bilateral regime, the national carrier’s interests could not be protected. This was also true for many other airlines belonging to the third world, since they did not have necessary aircraft (due to lack of funds) to operate on air routes even when they were entitled to the 50% rights. Consequently, foreign airlines filled the void because passenger traffic was diverted to these airlines. In recent times, there have been discussions on a possible movement from bilateral aviation agreements to multilateral aviation agreements. It was felt that the system of bilateral aviation restricted international air travel in several ways. In 2001, the United States signed the Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT) with Brunei, Chile, New Zealand, and Singapore. Multilateralism in aviation would involve the removal of restrictions on international route rights, number of designated airlines, establishment of airline offices in other countries, capacity, frequencies, type of aircraft, ground handling services, remittance of

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earnings, and allow for cooperative marketing arrangements, and provisions for dispute settlement.43 Nevertheless, India remained a strong supporter of the bilateral regime. It argued that international aviation liberalization could be undertaken under the aegis of the bilateral aviation regime as well since it allowed states to choose between several different types of agreements based on mutual benefits. The government believed that under a multilateral aviation regime, airlines from Europe and North America could easily marginalize the national carriers of third world country with their superior services, resources, and finances. As such, the multilateral system was deemed unacceptable by the government. Instead, India favored liberalization in international aviation under the existing framework of bilateralism.44 An important step in the country’s acceptance of liberalization of international air services involved India’s first and only ‘open skies agreement’ with the United States on April 14, 2005.45 An open skies agreement between two countries gives the designated airlines of both countries unrestricted landing rights in each others territory. Additionally, there would be no restrictions on number of seats offered, the types of aircraft used and international route rights. The new agreement replaced the 1956 bilateral air services agreement between the two countries. The new agreement was expected to make travel easier by offering easy air connectivity and convenient flight schedules and particularly help the outsourcing industry. The agreement seemed to be a timely one. Travel between the US and India had grown by 80.15% to 1.18 million in 2005, up from 655,000 passengers in 2002.46 The number of passengers flying between the two countries had grown by 25.8% between 2004-05 alone, and it was anticipated that air traffic between the two countries would continue to rise.47 It was expected that this agreement would encourage American

43

See Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT), Government of New Zealand, retrieved April 20, 2008 from 44 See Aruna Mascerhenas, Deputy Director, Planning and International Relations, Air India, at International Civil Aviation Organization, World-Wide Air Transport Colloquium: Montreal, 6-10 April 1992, in Proceedings: Exploring the Future of International Air Transport Regulation (Montreal: ICAO, 1992). 45 Ministry of Civil Aviation, Government of India, 2006. 46 Office of Travel and Tourism Industries, United States, 2006a; 2006b. 47 Ibid.

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commercial carriers to expand their operations to different parts of India. This seemed to be a reasonable expectation. Prior to the signing of the open skies agreement, among the several US airlines, only Delta Airlines and Northwest Airlines operated flights to Mumbai in India. Northwest Airlines also had a code-share agreement with KLM Royal Dutch Airlines which flew to Delhi. In the aftermath of the signing of the agreement, American Airlines and Continental Airlines have launched non-stop services to Delhi and Mumbai. In the past, India’s two national carriers have not been shy of entering into codesharing agreements. Condesharing involves the joint marketing of a flight operated by one airline as a flight for more than one airline. Code-sharing provides passengers with suitable connecting flights, increased frequency and also exposure for the airlines in an unserved market. As is the trend the world over with increasing deregulation of international aviation, Indian Airlines and Air India have signed code share agreements with several international airlines. Indian Airlines had signed codeshare agreements with Aerosvit, Air Astana, Kyrgzstan Airlines, and Uzbekistan Airlines, while Air India had signed code-share agreements with Air France, Air Mauritius, Aeroflot, Austrian Airlines, Emirates, Kuwait Airways, Lufthansa, Malaysia Airlines, Singapore Airlines, Swiss, Thai Airways International, and Turkish Airlines. Codesharing agreements offer several advantages including. With air traffic to and from India set to rise due to further economic liberalization and economic growth and the increasing importance of the country as a tourist destination, Indian Airlines and Air India realized that code-share agreements were a good way to gain access to this traffic and recover their lost share. Finally, one has also to look at the issue of global alliances among airlines and its impact on Indian carriers. At present there are three major global alliances: Star Alliance, One World, and Skyteam. An alliance involves agreement between two or more airlines. Alliances provide passengers with greater network connectivity, lower prices, increased frequencies, convenient transfers, and more destinations. For the airlines, it means lower costs due to cooperation in sales and marketing, maintenance, and ground-handling services. Air India will be joining Star Alliance, the largest airline alliance in the world, in mid-2009. Its current members include: Adria Airways, Air Canada, Air New Zealand,

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ANA, Asiana Airlines, Austrian Airlines, Blue1, bmi, Croatia Airlines, LOT Polish Airlines, Lufthansa, SAS, Singapore Airlines, Spanair, Swiss International Air Lines, TAP Portugal, Thai Airways International, United Airlines, and US Airways. After its merger with Indian Airlines, Air India began the process of joining Star Alliance. As per rules, its application to join was supported by an existing member, in this case Lufthansa. As is clear from the previous discussion, the deregulation process, which began with the repeal of the Air Corporations Act, 1953, has had a significant impact on air transportation in India. First, new private commercial operators entered into the domestic scheduled air services market. Although, several of these operators eventually went out of business not long after their establishment in the mid-1990s, a few of them prospered and were able to increase their market share vis-à-vis Indian Airlines. Beginning in 2003, low-cost carriers began to stamp their presence, further ushering in the benefits of deregulation for the consumer. India’s domestic and international air traffic increased significantly during this period. The changes associated with the deregulation also had an impact on the two national carriers. The monopoly status conferred on Indian Airlines was withdrawn. Although it initially faced difficulties, Indian Airlines was able to effect changes to its functioning and service, as it attempted to address the competition. Air India, on the other hand, had a rockier ride. While the issue of privatization of the two carriers fell through, the process of integration of the two airlines to cut costs proceeded apace. However, deregulation was not confined to the domestic sector. By the late-1990s and early 2000s, the concept of open skies, code-sharing, and airline alliances began to be looked at with interest by the government. The two national carriers have adapted to the changed circumstances and thinking. The entire process of deregulation has been one of learning, changing, and adaptation. While several private commercial operators have displayed good performance, some airlines, including the national carriers, have had a much more difficult time. Nevertheless, all of them have attempted to keep pace with the changes associated with deregulation and have succeeded to some extent. Deregulation of the airline industry itself can be described as a success for the consumer because it has brought with it more choices in airlines, more frequency, more capacity, lower fares,

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faster connectivity, and better services. As such, the airline industry benefited from the deregulation process as it engineered competition and efficiency and provided better services for the consumer.

Problems associated with Deregulation of the Airline Industry in India However, despite the rosy picture, there continues to be several problems plaguing the air transport sector in India. The Naresh Chandra Committee on a Road Map for the Civil Aviation Sector had carried out an extensive study on this issue.48 In its report, it pointed out the several problems facing this sector. First, it argued that India had not been able to take advantage of the increasing international air traffic. India received only 0.3% share of the worldwide tourist traffic in 2002. Thus, there was potential loss of foreign exchange. Second, airports in India remained under-utilized. About 50% of the 122 airports were not being utilized by the airlines leading to increased congestion, delays, and higher charges for the airlines. Third, the report pointed out that state ownership of Indian Airlines and Air India continued to hamper the operations of these two airlines.49 The process for aircraft procurement was often cumbersome and required approval from several different ministries and agencies within the government. Managerial autonomy, whether it was with regard to aircraft procurement or long-term planning, was also quite limited. Fourth, privatization of Indian Airlines and Air India had been stymied and regardless of whether the two airlines were allowed to tap capital from equity markets or not, they remained under the control of the government. Fifth, the report claimed that certain policies of the government continued to be unfair to the private commercial operators.50 For example, in 2003, private commercial operators were not allowed to establish hangars for maintenance operations and they had to outsource maintenance to other countries at great costs to them. Sixth, the fiscal burden on airlines is cut into the profit margin of airlines. High excise duty and sales tax on Aviation Turbine Fuel (ATF), high customs duty and sales tax on AVGAS (fuel used for 48

See Report of the Naresh Chandra Committee on A Road Map for Civil Aviation Sector, 2003. Issued by Ministry of Civil Aviation. 49 Ibid. 50 Ibid.

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trainer aircrafts at flying clubs), Inland Air Travel Tax (IATT), Foreign Travel Tax (FTT), and Passenger Service Fee (PSF), and high airport charges had ended up almost crippling the industry. Further, the monopoly enjoyed by the government-owned oil companies over supply of ATF kept the fuel prices artificially high. Seventh, certain restrictions placed on private commercial operators with regard to operating internationally and ground-handling capacity hampered their performance. For example, only airlines with a minimum fleet of 20 aircraft and 5 years of continuous operations in the domestic sector are allowed to mount international operations. Finally, there was a need for increased co-ordination between different ministries and agencies of the government which were responsible for the functioning of airports in order to improve the latter’s operational efficiency.51 The report also pointed out several other issues that have proved harmful for the sector. The policy regarding route dispersal guidelines have forced several airlines to operate on commercially unviable routes thus eating into their profit margins. Entry barriers placed on domestic scheduled air services with respect to minimum fleet size and equity capital have also been arbitrary without taking into consideration other important issues. Finally, with increasing number of players in the domestic aviation sector, there was a need to overhaul safety and security regulations for the industry, which has yet to be initiated. The Committee therefore recommended among other things that the government look closely at these issues and address the shortcomings. The Committee asked the government to take steps to increase the tourist traffic coming into India by liberalizing air charter services and allowing foreign airlines to mount more operations to India. In addition, it recommended capacity augmentation for Air India. It also recommended better utilization of secondary airports in India and partial privatization of the national carrier, so that it can compete more effectively in the post-deregulation period. Further, the Committee recommended that the government ease restrictions placed on private commercial operators on flying abroad, take steps to remove some of the entry barriers in the sector, and re-evaluate the route dispersal guidelines. Finally, the Committee also saw great scope for improving inter-ministerial coordination and urged 51

Ibid.

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the government to look at the issue of high fuel costs and taxes so as to ease the financial burden for the airlines.52 Notwithstanding these recommendations, several of the above problems outlined by the committee, continue to persist till today.

Summary and Conclusions The purpose of this chapter was to explore the issue of deregulation of airline industry in India and its effects. It began by outlining the motivations behind the nationalization of both Indian Airlines and Air India and the reasons for setting up a monopoly regime for them. Nationalization of the airline industry was part of a broader ideological direction that the new government had embarked upon after independence. In keeping with its belief in the saliency of the public sector as a means to achieve equitable economic growth, it mandated that domestic scheduled services in the air transport sector could only be offered by the national carrier, Indian Airlines. This chapter then discussed some of the factors that may have motivated the government to deregulate the airline industry. These factors included the desire to promote economic development, desire to improve air services, and the international trend towards liberalized airline competition. The desire to promote economic development included such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism and attracting foreign investment in the airline industry. The desire to improve air services included issues and factors like the increased demand for air services, poor performance of the national carriers, and desire to encourage competition. Finally, an important motivating factor to be considered is the international trend towards liberalized airline competition. The chapter then went on to analyze the performance of these two airlines. The study makes it clear that despite their protected status, the national carriers’ record was less than satisfactory. Combined with an ideological shift during the late-1980s and early1990s and economic liberalization, it set the context for deregulation of the airline industry.

52

Ibid.

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After reviewing the experience and performance of Indian Airlines and Air India and other new entrants in the air transport sector in the post-deregulatory period, it is clear that both Indian Airlines and Air India have had to cope with the changing circumstances. They have both come up with mixed results. Indian Airlines has been able to turn around its poor performance, but Air India seemed to have a much tougher time. On the other hand, the new private commercial operators had been able to reap some of the benefits of deregulation. While some of the initial entrants in the post-deregulatory period crash-landed due to lack of finances, bad management, and government restrictions, others were able to chart their path to success. The study on the deregulation of airline industry helped to highlight several interesting issues. We can see that despite the growth of the air transport sector as a result of the deregulation process, certain problems continue to plague the sector. It is up to the government to take necessary action in this regard. While several of these problems may not be easy to solve and require consistent effort on part of the government, addressing these problems will ensure stable growth in the air transport sector benefiting both the domestic airlines and the general public. Nevertheless, what is unmistakable is the growth story of the Indian airline industry after deregulation. Deregulation has benefited those who have adapted best to the changes associated with it. In the near future, it is expected that there would be further relaxation of several rules and regulation associated with the air transport sector. These changes should beneficial for the air transport sector. The ultimate beneficiaries are expected to be the consumers.

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CHAPTER THREE Deregulation of the Airline Industry in India: Conditioning factors Introduction The previous chapter presented some of the factors that may have motivated the government to deregulate the airline industry. These factors included the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. However, it is also hypothesized that the strategy adopted by the government in pursuit of the above-mentioned goals, was influenced by several conditioning factors. The purpose of this chapter is to explain these factors in greater detail. As mentioned before, these factors included established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. Established international practices and procedures included the bilateral system of air services agreements, “freedoms of the air”, nationality restrictions, and International Civil Aviation Organization (ICAO) and World Trade Organization-General Agreement in Trade and Services (WTO-GATS) provisions. National security and safety concerns included India’s relations with other countries, the impact of terrorism and organized crime, the government/military’s desire to have access to civilian aircraft, and the maintenance of aviation safety. Finally, an important conditioning factor was the pluralist nature of Indian politics. This included issues like the demands and compulsions of coalition government, the impact of interest groups and labor unions, and the role of the states of India

Established international practices and procedures This section details the regulatory framework that governs international air transport. It will explain the bilateral system of air services agreements, “freedoms of the air”, nationality restrictions, and ICAO and WTO-GATS provisions.

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(a) Bilateral system of air services agreements The bilateral system of air services agreements may have also influenced the government in its determination of the process and pace of deregulation of the airline industry. The government supports the bilateral system of air services agreements. As Aruna Mascerhenas, former Deputy Director, Planning and International Relations, Air India points out, “Bilateral agreements alone could prevent a total take-over of the industry by a dozen or so mega airlines.”53

As pointed out in the previous chapters, one of the guiding principles of international air transportation is the recognition that every country has sovereign rights over its air space and these countries retain the right to permit scheduled airlines operating from, into, and within their territories (Mani, 1994b). The Chicago Convention on International Civil Aviation of 1944 laid the basis for the bilateral aviation regime.54 Bilateral agreements codify the rights of countries to operate aircraft to and from other countries and is based on the idea of ‘equality of opportunity’, which means that each country has a right to 50% of its international traffic (V. Reddy, 1994). The international air services rights governing air transport between countries are usually referred to as the “freedoms of the air”.55 There are currently seven freedoms of the air in existence:

•

First Freedom – The right of an airline of one country (Country A) to fly over the territory of another country (Country B) without landing.

53

See Aruna Mascerhenas, Deputy Director, Planning and International Relations, Air India, at International Civil Aviation Organization, World-Wide Air Transport Colloquium: Montreal, 6-10 April 1992, in Proceedings: Exploring the Future of International Air Transport Regulation (Montreal: ICAO, 1992). 54 See Chicago Convention on International Civil Aviation, ICAO, Doc. 7300/6, 1980. 55 See ICAO Manual on the Regulation of International Air Transport (Doc 9626, Part 4), ICAO, 2008c. accessed April 12, 2008.

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•

Second Freedom – The right of an airline of one country (Country A) to land in another country (Country B) for non-traffic purposes, such as maintenance and refueling, while en route to another country (Country C).

•

Third Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) from its own country (Country A) to another country (Country B).

•

Fourth Freedom – The right of an airline of one country (country A) to carry traffic (passengers, mail, cargo) from another country (Country B) to its own country (Country A).

•

Fifth Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) between two foreign countries (between Country B and Country C) as long as the flight originates and terminates in its own country (Country A). This freedom is divided into two categories: (a) Beyond Fifth Freedom, which allows the right of an airline of one country (Country A) to carry traffic from the second country (Country B) to the third country (Country C); (b) Intermediate Fifth Freedom, which allows airline of one country (Country A) the right to carry traffic from the third country (Country C) to the second country (Country B).

•

Sixth Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) between two countries (between Country B and Country C) via its own country (Country A). This is a combination of two sets of third and fourth freedoms (with Country B and Country C).

•

Seventh Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) between two other countries (Country B and Country C) without continuing service to one’s country (Country A).

•

Eighth Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) within a foreign country (Country B) with continuing service to or from one's own country. This freedom is also known as Cabotage, and is extremely

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rare. A good example is the European Union (EU), which has granted such rights between all of its member-countries.

•

Ninth Freedom – The right of an airline of one country (Country A) to carry traffic (passengers, mail, cargo) within a foreign country (Country B) without continuing service to or from one's own country (Country A). Again, the EU is an example of this.

International air services are made possible through air services agreements between countries (Bhatt, 1997). These agreements designate the number of airlines, frequency of services, destinations, capacity and size of aircraft of each country providing air services. Air services agreements are entered into by the respective governments of two countries following negotiations regarding the above issues. Air services agreements may be amended through negotiations, as necessary, in the event of requirement of additional capacity or rights due to traffic increase. Historically, governments across the world have focused on protecting the interests of their national carriers instead of the interests of the consumers (Davies, 1964). However, economic growth and development has resulted in increase in air travel between countries over the past half a century. In recent times, the dynamic nature of the international aviation industry required the renegotiation of many bilateral agreements that had been concluded earlier between countries (A. Reddy, 1994). Previous restrictions regarding airline designation, frequency, seat capacity, and routes have been progressively removed. Several countries have modified their previous bilateral air services agreements and concluded ‘open skies’ agreements between themselves. These agreements allow the designated airlines of both countries unrestricted landing rights in each others territory. Additionally, there are no restrictions on the number of seats offered, the types of aircraft used, and international route rights. Nevertheless, bilateral agreements are the basis of international operations between India and other countries. Over the last half a century, in an attempt to regulate the flow of traffic to and from the country, India has signed 100 bilateral aviation agreements (Ministry of Civil Aviation, Government of India, 2006). Such agreements specified fixed number of flights to fixed number of destinations on the basis of

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reciprocation. However, of the 100 air services agreements signed by India with other countries, only 52 are being utilized. Of the 52 being utilized, India (through Air India, Jet Airways and JetLite) utilizes only 25, while the foreign airlines utilize all (see Figure 2).

Figure 2: Bilateral Air Services Agreement and India

100

52

48

52

25

Total ASAs

Utilized ASAs

Unutilized ASAs

Foreign country utilization

Indian utilization*

* India’s utilization of 25 air services agreements are shared between Air India, Jet Airways and JetLite Source: Ministry of Civil Aviation, Government of India, 2006.

Certain provisions are common across most of these air services agreements (Sivaraman & Singh, 1994). First, traffic rights are controlled by the government and it has designated Air India, Jet Airways, and JetLite as the Indian carriers. Second, these agreements specify restrictions on the frequency of flights, seat capacity and routes served. Frequently, negotiations regarding amendment of particular air services agreements center around the designation of carriers, frequency of flights, and routes serviced. Third, these agreements also include codesharing arrangements with designated airlines of other countries (Sivaraman & Singh, 1994). Fourth, these agreements codify mutually approved tariffs to be charged for carriage of traffic (excluding mail). Fifth, 79

royalty charges to be paid to government in the event of any increase in capacity by foreign airlines to India and absence of corresponding increase by Indian carriers to that country, are also included in these agreements. Finally, these agreements specify the requirement of designated carriers to be ‘substantially owned’ and ‘effectively controlled’ by the government or citizens of the country with which the air services agreement has been concluded (Ministry of Civil Aviation, Government of India, 2006).

Table 11: Air services to and from key markets (2005-2006)

S No.

Countries

Number of

Direct

Foreign

Indian

international

Services

Carriers

Carriers

scheduled passengers (in millions) 1.

Dubai (UAE)

2.195

Yes

Yes

Yes

2.

Singapore

1.762

Yes

Yes

Yes

3.

UK

1.472

Yes

Yes

Yes

4.

Sri Lanka

1.278

Yes

Yes

Yes

5.

Saudi Arabia

1.177

Yes

Yes

Yes

6.

Germany

1.084

Yes

Yes

Yes

7.

Thailand

1.006

Yes

Yes

Yes

8.

Malaysia

0.778

Yes

Yes

Yes

9.

USA

0.746

Yes

Yes

Yes

10.

France

0.585

Yes

Yes

Yes

Source: Directorate General of Civil Aviation, Government of India, 2008b.

The international passenger traffic handled by Indian airports during May 2006 registered a growth of 15.7% to reach 1.99 million passengers, up from 1.72 million during the same period in the previous year (Phadnis, 2006). Table 11 denotes

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international scheduled passenger figures connectivity between India and its ten key markets during the year 2005-2006. As is clear from the table, India is well connected with direct air services (offered by both foreign and Indian carriers) to all the key markets. In addition, Indian carriers offer direct air services to all these markets. Air connectivity between India and these countries is dependent on the bilateral air services agreement that have been signed between the respective governments. In international aviation, there are broadly two types of bilateral air services agreements: ‘traditional model’ and ‘open skies model’. The following sections elaborate these two models.

(i) Bilateral air services agreement: India-France (traditional model) The majority of bilateral air services agreements that India has signed with other countries may be classified under the traditional model. Under this form of agreement, there is a strict sharing of international air traffic to and from the respective countries (Sivaraman & Singh, 1994; Bhatt, 1994). These agreements outline the restrictions on the number of frequencies that can be operated and the type of aircraft that can be operated, and the equivalent number of seats offered by designated airlines of the two countries every week. As an example, the India-France bilateral air services agreement designates Air India and Air France as the only two airlines that can fly between the two countries (Ministry of Civil Aviation, Government of India, 2007). Each can only operate 35 flights per week to destinations in India and France, operate aircraft not exceeding the size of a Boeing 747, and only offer 14,000 seats every week (Table 12). The air services agreement between India and France incorporated several important provisions governing air traffic between the two countries (Ministry of Civil Aviation, Government of India, 2007). First, the agreement stated that both parties may designate one or more airlines to operate on the agreed services (but on specified air routes). Second, the agreement spelled out certain ‘points of call’. In India, these included Mumbai, Delhi, Kolkata, Bangalore, Chennai, and Hyderabad, while in France, the sole point of call is Paris. The Indian side had also received the rights to fly ‘beyond’ France to points like New York, Toronto, Montreal, and four other North American destinations

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of its choosing. Third, both sides agreed that the designated airlines of each country would be entitled to operate with their own aircraft, or through codesharing agreements, on the specified upto thirty-five (35) weekly services with any aircraft type upto Boeing 747 and ‘beyond’ flight rights (fifth freedom) to other destinations. Fourth, both sides agreed that the designated airlines of each country would be entitled to enter into codesharing agreements to operate the frequency entitlement. Finally, the two sides would assist the designated airlines of each country in the acquisition of commercially viable slots at airports in both countries (but on a reciprocal basis) (Ministry of Civil Aviation, Government of India, 2007). Table 12: Air Services Agreement between India and France, 23rd February 2005

Foreign (French) Entitlements

Indian Entitlements

No. of

Aircraft

Equivalent

No. of

Aircraft

Equivalent

Frequency

Type/Seat

Seats

Frequency

Type/Seat

Seats

Limit 35

Any aircraft

Limit 14000

35

Any aircraft

upto Boeing

upto Boeing

747

747

Designation Clause: Multiple

Designation Clause: Multiple

Airlines Operating: Air France

Airlines Operating: Air India

14000

Source: Ministry of Civil Aviation, Government of India, 2007

The key issues to keep in mind here are that there are restrictions regarding seat capacity, frequency, aircraft type, points of call, and airport slots. The air services agreement between India and France is therefore a good example of the traditional model and most of the air services agreements that India has signed with other countries are similar to this agreement.

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(ii) Bilateral air services agreement: India-United States (open skies model) This section examines the open skies agreement between India and the US countries. Unlike the traditional bilateral air services agreement, this type of agreement significantly removes restrictions on frequency, routes, capacity and type of aircraft regarding air travel between the two countries (Ministry of Civil Aviation, Government of India, 2008b). An open skies agreement between two countries gives the airlines of both countries unrestricted landing rights in each others territory. Additionally, there would be no restrictions on number of seats offered, the types of aircraft used, international route rights, and no demand for regularity of service (Bhatt, 1997). The removal of restrictions on services to India by foreign commercial carriers would also encourage foreign investment in India, with the airlines investing in ground operations, ticketing and reservations offices, etc. Table 13: Air Services Agreement between US and India, 14th April 2005

Foreign (US) Entitlements

Indian Entitlements

No. of

Aircraft

Equivalent

No. of

Aircraft

Equivalent

Frequency

Type/Seat

Seats

Frequency

Type/Seat

Seats

Limit

Unlimited

Unlimited

Limit Unlimited

Unlimited

Unlimited

Designation Clause: Multiple

Designation Clause: Multiple

Airlines Operating: American Airlines

Airlines Operating: Air India

Continental Airlines

Unlimited

Jet Airways

Delta Airlines Northwest Airlines

Source: Ministry of Civil Aviation, Government of India, 2008b

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India’s first and only open skies agreement till date was signed with the US on April 14, 2005 (Ministry of Civil Aviation, Government of India, 2008b). The new agreement replaced the previous 1956 bilateral air services agreement between the two countries. The new agreement was expected to make travel easier by offering better air connectivity and convenient flight schedules and, in particular, help the outsourcing industry. The agreement seemed to be a timely one. Travel between the US and India had grown by 80.15% to 1.18 million in 2005, up from 655,000 passengers in 2002 (Office of Travel and Tourism Industries, US Department of Commerce, 2006a; 2006b). The number of passengers flying between the two countries had grown by 25.8% between 2004 and 2005 alone and it was anticipated that air traffic between the two countries would continue to rise (Office of Travel and Tourism Industries, US Department of Commerce, 2006a; 2006b). It was expected that this agreement would encourage American commercial carriers to expand their operations to different parts of India, so as to profit from the increasing traffic. The air services agreement between India and the US incorporated several provisions regarding designation of airlines, frequency, capacity, routes, service, and type of aircraft (Ministry of Civil Aviation, Government of India, 2008b). The agreement first sets out the ‘first freedom rights’ (the right of an airline of one country to fly over the territory of another country without landing) and ‘second freedom rights’ (the right of an airline of one country to land in another country for non-traffic purposes, such as maintenance and refueling, while en route to another country). At the same time, it placed restrictions on ‘fifth freedom rights’ (the right of an airline of one country to carry traffic between two foreign countries as long as the flight originates and terminates in its own country) (Ministry of Civil Aviation, Government of India, 2008b).

•

Each Party grants to the other Party the following rights for the conduct of international air transportation by the airlines of the other Party: •

the right to fly across its territory without landing;

•

the right to make stops in its territory for non-traffic purposes; and

•

the rights otherwise specified in this Agreement.

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•

Nothing in this Article shall be deemed to confer on the airline or airlines of one Party the rights to take on board, in the territory of the other Party, passengers, their baggage, cargo, or mail carried for compensation and destined for another point in the territory of that other Party.

Keeping in mind the need to increase frequency/capacity on flights between the two countries, there were no restrictions placed on the number of airlines that can offer services on these routes. No restrictions were placed on frequency/capacity or prices (unless discriminatory).

•

Each Party shall have the right to designate as many airlines as it wishes to conduct international air transportation in accordance with this Agreement and to withdraw or alter such designations.

•

Determine the frequency and capacity of the international air transportation it offers based upon commercial considerations in the marketplace.

•

Not to have the volume of traffic, frequency or regularity of service, or the aircraft type or types operated by the designated airlines limited by any Party, except as may be required for customs, technical, operational, or environmental reasons.

•

Establish prices based upon commercial considerations without intervention by Parties unless it is in the course of restricting discriminatory prices, protection of airlines from artificially low prices, protection of consumers from unreasonably high prices

There were several other rights that had been accorded to the designated airlines of each country including the right to establish offices, employ staff, provide ground staff services, sell tickets, and enter into cooperative arrangements in the other country (Ministry of Civil Aviation, Government of India, 2008b). The airlines of each Party had the right to:

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•

establish offices in the territory of the other Party for the promotion and sale of air transportation;

•

bring in and maintain in the territory of the other Party managerial, sales, technical, operational, and other specialist staff required for the provision of air transportation;

•

perform its own ground-handling in the territory of the other Party ("self-handling") or, at its option, select among competing agents for such services in whole or in part;

•

engage in the sale of air transportation in the territory of the other Party directly and, at the airline's discretion, through its agents;

•

enter into cooperative marketing arrangements such as blocked space, code-sharing or leasing arrangements, with •

an airline or airlines of either Party;

•

an airline or airlines of a third country; and

•

a surface transportation provider of any country;

The airlines of each country also received preferential treatment regarding currency sale and exchange with respect to purchase of fuel, transportation and taxes (Ministry of Civil Aviation, Government of India, 2008b):

•

sell such transportation, and any person shall be free to purchase such transportation, in the currency of that territory or in freely convertible currencies;

•

convert and remit to its country, on demand, local revenues in excess of sums locally disbursed;

•

pay for local expenses, including purchases of fuel, in the territory of the other Party in local currency;

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•

be exempt, on the basis of reciprocity, from all import restrictions, property taxes and capital levies, customs duties, excise taxes, and similar fees and charges that are not based on the cost of services provided for aircraft stores, ground equipment and spare parts (including engines), fuel, lubricants and consumable technical supplies, and promotional and advertising materials;

Finally, the rights of the designated airlines of each country’s are protected and they are presented with equal opportunity to compete in each other’s markets.

• just, reasonable, non-discriminatory, and equitably apportioned User charges imposed; • a fair and equal opportunity for the designated airlines of both Parties to compete

As is clear from the above agreement, the rules and regulations were much more liberal than the traditional bilateral air services agreements. The open skies agreement, thus, removed restrictions with regard to designation of airlines, frequency, capacity, routes, pricing, and regularity of services. However, the government’s determination of the process and pace of deregulation was strongly influenced by the international bilateral aviation regime. Although the government had re-negotiated some of its bilateral agreements with other countries (which has liberalized international air travel to some extent), the bilateral system still forms the basis of international air services agreements with other countries. According to the Thirty-Fifth Report of the Committee on Public Undertakings (1987-88), bilateral air services agreements were important because, “While Air India may not benefit directly from a particular air services agreement, the advantages that accrue to the country in the form of foreign exchange earned, landing and navigational charges, fuel charges, employment opportunities and inflow of tourists cannot be ignored.”56

56

See Lok Sabha. Committee on Public Undertakings (1987-88), Thirty-Fifth Report: Air India – Working Results and Traffic Growth (Action Taken). New Delhi: Lok Sabha Secretariat, 1988, p.19.

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Similarly, according to the Planning Commission’s Planning Group Report titled “Civil Aviation at the Turn of the Century”, “While a more liberal (tourism) charter (air services) policy will clearly be beneficial, the same degree of liberalization in exchanging bilateral rights form scheduled services and opening up of more airports, for direct international operations may not be quite so beneficial, particularly in so far as the foreign exchange outgo is considered.”57

The government had been careful to limit the role of foreign airlines in the Indian airline industry. India had also refused to participate in any multilateral system of air services that liberalized traffic exchange rights to a greater degree than what existed under the bilateral aviation system. The only open skies agreement which India has signed till date is with the US. It has not shown any inclination to enter into similar agreements with other countries. According to Aruna Mascerhenas, “National interest has now led some of the larger countries, whose airlines are positioned to dominate the industry, to push for liberalization and to go beyond the bilateral system…It, however, remains in the national interest of a vast majority of countries like India to continue with a bilateral regime which affords an opportunity to its national airlines to compete. Bilaterals, at least, offer protection from capacity dumping which…is almost inevitable in a noholds-barred competition where the candidates are totally mismatched in terms of size and financial muscle.”58

Although the government wanted to encourage greater air connectivity between India and the rest of the world, it was also mindful of the fact that allowing foreign airlines to mount more than their share of 50% flight rights would lead to marginalization of Air India. The government felt that allowing foreign airlines to fly unrestricted to and from India would make it difficult for Air India to compete due to lack of capital, small 57

See Planning Commission. Report of the Planning Group on Civil Aviation at the Turn of the Century. New Delhi, 1986. 58 See Aruna Mascerhenas, Deputy Director, Planning and International Relations, Air India, at International Civil Aviation Organization, World-Wide Air Transport Colloquium: Montreal, 6-10 April 1992, in Proceedings: Exploring the Future of International Air Transport Regulation (Montreal: ICAO, 1992).

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fleet, and inadequate services relative to foreign airlines. Eventually, the market would be cornered by these foreign airlines and lead to loss of foreign exchange for India. The government had considered these issues during the process of deregulation. As such, the government’s determination of the process and pace of deregulation may have been strongly influenced by the bilateral aviation regime and the international air freedom rights

(b) Nationality restrictions Restrictions on ownership based on nationality may also have been a key element in the airline industry deregulation process. While the government had initiated the deregulation of the airline industry, it did not permit foreign airlines to operate domestic services in India. According to Praful Patel, India’s current minister for civil aviation, “Allowing foreign carriers to invest in domestic airlines will not lead to any value addition for the domestic carriers in terms of their operations or management expertise.”59

This section takes a closer look at the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994, which outlined the nationality restrictions in the aviation sector. This section is particularly important since it describes the regulatory framework, which governs foreign involvement in the Indian aviation sector and presents evidence with regard to some of the restrictions that foreign airlines face. The issue of nationality restrictions may also have played a major role in the government’s determination of the process and pace of deregulation. The regulations governing foreign investment and equity participation in the domestic air transport sector in India are outlined in this section. These regulations were originally part of the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994. Over the next decade or so these regulations have been amended in response to changing conditions and requirements. The current regulations governing foreign investment and equity participation in the Indian air transport services are outlined in the Government of

59

See “A small step forward: foreign airlines welcome but…”, The Tribune, October 22, 2004. Retrieved from

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India Notification No. AV.13011/10/96-DT (Vol. II) dated November 10, 2004 (Ministry of Civil Aviation, Government of India, 2008c). The most important part of this notification dealt with the Foreign Direct Investment (FDI) limits in air transport services (domestic airlines). In summary, the provisions regulate foreign investment in domestic airlines to:

•

49% by foreign entities, corporations and individuals through automatic route,

•

100 % by Non-Resident Indians (NRIs) through automatic route,

•

No direct or indirect equity participation by foreign airlines is allowed.

The notice outlined a number of restrictions placed on foreign investment and equity participation by foreign airlines in domestic airlines in India. First, only citizens of India or a company that was registered in India, with two-thirds of board of directors of such airlines holding Indian citizenship, could function as a domestic operator. This was referred to as the ‘substantial ownership’ rule. This restricted foreign airlines from offering services within India (Ministry of Civil Aviation, Government of India, 2008c).

•

Permission to operate scheduled services will be granted either –


to a citizen of India; or




to a company or a body corporate provided that – •

it is registered and has its principal place of business within India;

•

its Chairman and at least two-thirds of its Directors are citizens of India; and

•

its substantial ownership and effective control is vested in Indian nationals.

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The notice also placed restrictions on the sources of investment available to domestic airlines and the latter were required to supply information regarding their shareholders and management (Ministry of Civil Aviation, Government of India, 2008c). It was made clear in the notice that foreign entities that seek to pick up equity in domestic airlines could not have foreign airlines as one of their shareholders. In addition, shareholders and management of foreign airlines and subsidiaries of foreign airlines could not own stakes in domestic airlines. The notice also set limits on the nature and representation of foreign entities in the companies, which held equity in Indian carriers (Ministry of Civil Aviation, Government of India, 2008c). . •

An applicant shall be required to furnish full and detailed information with regard to the shareholding of any airline in the foreign investing institution/entity, if any, and composition of the Board of Directors and senior management of the said foreign investing institution/entity.

•

Foreign financial institutions and other entities who seek to hold equity in the domestic air transport sector shall not have foreign airlines as their shareholders.

•

An applicant who seeks permission to operate air transport services in the domestic sector shall be required to give a declaration that no foreign airline is in financial or commercial tie-up with him or has the management/ownership interest in him.

•

Any foreign financial institution/entity which seeks to make investment in the domestic air transport sector shall not be a subsidiary of a foreign airline.

•

While the foreign investing institution/entity which seeks to hold equity in the domestic air transport sector may have representation on the Board of Directors of the Company, such representation shall not exceed 1/3rd of the total.

Finally, the owners of domestic airlines were forbidden to transfer control of their airlines to foreign airlines or have management contracts with foreign airlines. They were also forbidden from entering into any financial arrangements with foreign airlines. 91

•

A domestic sector air transport operator shall not have agreements such as shareholders agreements etc. with a foreign airline, containing provisions/arrangements empowering such foreign airlines or others on their behalf to have effective control in the management of the domestic airline.

•

A domestic air transport operator shall not enter into an agreement with a foreign airline which may give such foreign airline the right to interfere in the management of the domestic operator.

•

Management contract with a foreign airline shall also not be permitted to a domestic air transport sector operator.

•

A domestic air transport operator may enter into financial arrangements with a bank and/or other financial institutions for the purpose of lease-finance, hire-purchase or other loan arrangements, but such a tie-up shall not be permitted with a foreign airline.

The nationality restrictions placed on commercial operations by the government was in line with established international practices (V. Reddy, 1994; A. Reddy, 1994). As mentioned in the previous section, the eighth and ninth freedom rights were severely restricted around the world. India too restricted eighth and ninth freedom rights, wherein foreign airlines could not operate domestic scheduled services in India (Bhatt, 1994). This was because of the entry of foreign carriers into the domestic market would be harmful to the interests of the domestic carriers, particularly the national carriers. As India’s former civil aviation secretary, S. Kanungo, pointed out in 1992, progressive liberalization was desirable but one had to keep in mind the interests of the national carriers so that the “national interests of developing and small countries are adequately protected.”60

60

See Statement by S. Kanungo, Leader of the Indian Delegation, at the 29th Assembly of ICAO held in Montreal, from 22nd September to 8th October, 1992. Montreal: ICAO, 1992.

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Another reason why most countries, including India, maintained these nationality restrictions was due to national security and safety concerns. These issues will be discussed in greater detail later. Prior to that, the following section discusses some of the provisions outlined in important international organizations pertaining to international air transport.

(c) ICAO and WTO-GATS provisions The primary international organization which regulates international civil aviation is the International Civil Aviation Organization (ICAO). The ICAO is an agency of the United Nations and codifies the principles of international air transport. The ICAO was established by the Chicago Convention on International Civil Aviation in 1944 (Sachdeva, 1994). Article 44 of the Chicago Convention outlined the objectives of the ICAO.61 These objectives included the development of principles and techniques of international air navigation; foster the planning and development of international air transport; to ensure safe and orderly growth of aviation; to encourage arts of aircraft design; to encourage development of airways, airports and air navigation facilities; to meet the needs of the peoples of the world for safe, regular and economic air transport; to prevent economic waste by unreasonable competition; to ensure rights of countries for fair opportunity to operate international airlines; to avoid discrimination between countries; and to promote all aspects of international civil aeronautics.62 The ICAO recognized the absolute sovereignty of a country over its air space and its right to regulate the operation of scheduled airlines over, from and into its territory (V. Reddy, 1994; A. Reddy, 1994). It also supported the system of bilateral air services agreements between countries. Just as importantly, the ICAO agreed that countries could choose their own path and pace regarding deregulation of their respective airline industries and declared its global leadership role in all matters pertaining to international air transport.63

61

See Article 44 of the Chicago Convention on International Civil Aviation, ICAO, Doc. 7300/6, 1980. Ibid. 63 See Chicago Convention on International Civil Aviation, ICAO, Doc. 7300/6, 1980. 62

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All countries were subject to the regulations set forth by the ICAO and the Chicago Convention when it came to international air transport. International air transport between states has developed through the principle of bilateralism. As such, it is clear that the ICAO is the primary organization regulating international air transport. The only other international organization that regulated international air transport to a certain extent is the World Trade Organization, through the GATS (A. Reddy, 1994). The General Agreement on Trade in Services (GATS), an outcome of the Uruguay Round of negotiations, came into force in January 1995.

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It was one of the most

important agreements of the World Trade Organization and sets out the rules and regulations governing international trade in services. The GATS covered four modes of supply for delivery of services from one country to another: cross-border supply (e.g., telephone/mail), consumption abroad (e.g., tourists), commercial presence (e.g., bank branches), and presence of natural persons (e.g., accountants/teachers). It was made up of the framework agreement containing the general rules and principles and the national schedules of each country wherein their specific commitments on access to their domestic markets by foreign suppliers were outlined.65 Each country was free to decide upon the number of services and the degree to which foreign services providers could operate in their domestic markets. Countries who were members of the GATS agreed to fulfill both general obligations and specific commitments. Under the general obligations, members agreed to extend treatment to service suppliers of all other members, treatment no less favorable than that accorded to service suppliers of any other country. This was referred to as the Most-Favored Nation (MFN) treatment. Under the specific commitments, members agree not to operate discriminatory measures benefiting domestic service suppliers. This was referred to as national treatment.66 It must be kept in mind that the GATS allowed for exemptions to these obligations and commitments. The GATS recognized the right of members to regulate trade in services in accordance to national policy goals. However, all exemptions were 64

See the General Agreement on Trade in Services (GATS): objectives, coverage and disciplines. World Trade Organization. http://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm> accessed on 12 April, 2008. 65 Ibid. 66 Ibid.

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subject to review (to ensure that they did not constitute unnecessary barriers to trade) and were only valid for a temporary period of time.67 The general obligations and specific commitments required of members who were part of the GATS were directly at odds with some of the ICAO provisions governing international air transport. For example, the GATS outlined the principle of MFN, which prohibited countries from entering into preferential agreements with each other wherein the benefits were confined to the signatory countries. However, international air transport was regulated through the system of bilateral agreements which explicitly conferred preferential access to designated airlines of the respective countries. ICAO provisions specifically allowed countries to negotiate bilaterally with each other and there was no requirement to provide access to other states (Sivaraman & Singh, 1994). The reason for this was that the nature of bilateral air services agreements signed had to do with the individual needs of the signatory countries. Consider the open skies agreement between the US and India. An open skies agreement between the US and India confers a different set of benefits to US carriers (since they are larger and financially stronger than Indian carriers) than an open skies agreement between the US and EU (since they would be engaged in fierce competition with European carriers, which may end up harming their financial condition). In such a situation, American carriers (and the US government) would probably not be very enthusiastic about extending the same preferential treatment to EU carriers that they would be willing to grant to Indian carriers. ICAO provisions would support the US in this regard. This means that MFN principles of the GATS would not apply. Furthermore, the national treatment principle outlined in the GATS was also at odds with the nationality restrictions on commercial operations that most governments adhered to. Under the principle of national treatment, members agreed not to operate discriminatory measures benefiting domestic service suppliers. However, governments all around the world restricted market access to foreign airlines (Sachdeva, 1994). Cabotage restrictions and substantial ownership rules prevented foreign citizens and foreign airlines from competing with domestic airlines (V. Reddy, 1994). ICAO provisions stated that governments retained their sovereign right to regulate the entry of foreigners into the 67

Ibid.

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domestic air transport market and were not required to grant national treatment to any foreign airlines (Mani, 1994b). As such, the GATS principles do not apply to international air transport. Even though some GATS provisions were relevant to international air transport, they reflected the degree to which the international airline industry had worked to exclude air traffic rights from the GATS arrangement. The GATS annex on Air Transport Services exempted from coverage measures affecting air traffic rights and services directly relating to the exercise of such rights.68 According to the annex,

•

It is confirmed that any specific commitment or obligation assumed under this Agreement shall not reduce or affect a Member's obligations under bilateral or multilateral agreements that are in effect on the date of entry into force of the WTO Agreement.

•

The Agreement, including its dispute settlement procedures, shall not apply to measures affecting •

traffic rights, however granted; or

•

services directly related to the exercise of traffic rights, (except as provided below).

•

The Agreement shall apply to measures affecting: •

aircraft repair and maintenance services;

•

the selling and marketing of air transport services;

•

computer reservation system (CRS) services

.

•

The dispute settlement procedures of the Agreement may be invoked only where obligations or specific commitments have been assumed by the concerned Members and where dispute settlement procedures in bilateral and other multilateral agreements or arrangements have been exhausted.

68

See Economic Policy Section (ECP), GATS Annex on Air Transport Services. ICAO, 2008b. Retrieved from on 12 April, 2008.

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As such, it was clear that the GATS provisions did not apply to international air transportation. Even dispute settlement mechanisms in the GATS could only be resorted to after countries had exhausted the dispute settlement mechanisms outlined in their respective bilateral air services agreements. As such, the ICAO is the primary international organization regulating international air transportation. The ICAO argues that, “Applying the basic GATS principle of most favored nation (MFN) treatment to traffic rights remains a complex and difficult issue…it is also inconclusive at this stage as to whether the GATS is an effective option for air transport liberalization.”69

The government was therefore under no pressure from the GATS agreement to liberalize international air traffic services. As Aruna Mascherhenas pointed out, the government preferred the bilateral system to the multilateral system of aviation, as it was too early to adopt the multilateral concept of air transport. “The main weakness of the global multilateral concept is that it is geared to an economic philosophy which has seen little application in the real world.”70

The ICAO has stated that the system of preferential bilateral agreements and phased deregulation of the airline industry was acceptable depending on the demands and constraints of individual countries. The government in India was therefore under no pressure from the GATS agreement to liberalize international air traffic services. The determination by the government regarding the process and pace of deregulation of the airline industry had been influenced by the position adopted by the ICAO and other countries in international forums. India did not see any need to deregulate its airline industry to the extent that GATS provisions call for in other services sectors. 69

See Consolidated Conclusions, Model Clauses, Recommendations and Declarations. International Civil Aviation Organization, “The Fifth Worldwide Air Transport Conference, 24-28 March 2003”. ICAO, 2008a. Retrieved from http://www.icao.int/icao/en/atb/atconf5/> on 12 April 2008. 70 See Aruna Mascerhenas, Deputy Director, Planning and International Relations, Air India, at International Civil Aviation Organization, World-Wide Air Transport Colloquium: Montreal, 6-10 April 1992, in Proceedings: Exploring the Future of International Air Transport Regulation (Montreal: ICAO, 1992).

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Therefore, established international practices and procedures, particularly the system of bilateral aviation, nationality restrictions and ICAO and WTO-GATS provisions may have played an important role in the government’s determination of the process and pace of deregulation of the Indian airline industry.

National Security and Safety Concerns A second set of conditioning factors that may have influenced the government were national security and safety concerns. Security concerns included India’s relations with other countries, the impact of terrorism and organized crime, and the government/military’s desire to have access to civilian aircraft (Mani, 1994a). In addition, safety concerns regarding the airline industry had led the government to play an active role, since aviation safety was, primarily, the responsibility of individual governments. The government was mindful of the security concerns affecting the sector. According to the Naresh Chandra Committee Report, “In the current security environment, a liberalized aviation sector will have to weave the security requirement into almost all aspects of air transport activities.”71

Due to the nature of its relations with some countries, India was sensitive about their involvement in its economy (Mani, 1994a). The countries that generated the most concerns included China and Pakistan, with whom India had fought wars with in the past. In 2007, the Government’s Joint Intelligence Committee (JIC) had particularly singled out Chinese companies whose investments, mergers and acquisitions were considered potentially inimical to India’s national interests.72 For example, it pointed out that Huawei, founded by a former People’s Liberation Army (PLA) officer and current member of the Chinese Communist Party, had research and development operations in Bangalore and wanted to expand its operations in India but that its expansion would not be in the interests of India’s national security. 71

See Naresh Chandra Committee Report on a Road map for the Civil Aviation Sector. Ministry of Civil Aviation, November 2003, p.62. 72 See Ritu Sarin’s Govt red-flags FDI again, singles out Chinese, Dubai and Saudi firms in India. Indian Express, 16 November 2007. Retrieved from 12 April 2008.

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Similarly, the JIC pointed out that Dubai Ports World (DPW) connected with container terminals at major Indian ports like Chennai, Vizag, and Mundra, had won major contracts from the Pakistani government to operate the Gwadar deep-sea port built by China Harbor Engineering Corporation. It argued that the presence of DPW in India’s ports would not be in the interests of national security as it could engage in direct and real-time collection and dissemination of intelligence and pass it on to Pakistani intelligence officials. With respect to the aviation sector, the JIC had pointed out that China’s stateowned China Great Wall Industry Corporation (CGWIC) held a majority stake in the Great Wall Airlines which had plans to apply for cargo operations in Chennai and Mumbai. However, the CGWIC had very close links with the PLA and, since 1991, had been under sanctions imposed by the US for alleged missile proliferation. It argued that the Chinese had in the past taken a keen interest in monitoring India’s nuclear establishments and missile and satellite launch facilities and thus, the presence of the Great Wall Airlines was not desirable.73 Similar concerns had led to the disqualification of a Chinese company from the bidding process for building an aerobridge at the Delhi airport, and the imposition of certain rules which stated that X-ray scanners for airports could no longer be procured from companies with links to China.74 There were also concerns raised by Indian security agencies about the appointment of a Greek chief operating officer for GMR-Fraport Company (the private operator for Delhi International Airport Limited), because they felt that he would know the movements of important government leaders like the president and prime minister.75 The government closely monitored foreign direct investment and participation in domestic ventures to see if they endangered national security.76 Sensitive sectors included telecom, ports, shipping, banking and insurance, and aviation. Determination of whether particular FDI proposals represented threats to national security was done in an ad hoc

73

Ibid. See Puja Mishra’s “Eagle Eye on FDI”. Retrieved from on 12 April 2008. 75 Ibid. 76 Ibid. 74

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and piecemeal way. As such, denying certain Chinese companies from investing in India had complicated India’s relations with China.77 While India’s relations with China suffered in the aftermath of the 1962 border war between the two countries, in recent times both countries have attempted to mend relations. China is now India’s largest trading partner, a position it achieved by surpassing the US in 2007, and thus India is keen on developing good relations with China.78 However, security concerns regarding Chinese involvement in India’s economy, particularly in certain sensitive sectors persist.79 National security concerns were not limited to the possibility of multinational corporations in certain countries being used for anti-national activities. The government also feared the involvement of terrorists and members of organized crime syndicates in the aviation sector. According to Kamal Nath, India’s current commerce and industries minister, “We need a proper regulatory framework to address issues about our security concerns and sensitivities.”80

The Bureau of Civil Aviation Security (BCAS) is the primary governmental agency responsible for aviation security in the country (Ministry of Civil Aviation, Government of India, 2008d). Among other things, the BCAS coordinates with different governmental agencies to identify threats to India’s aviation industry emanating from anti-national elements, including terrorists and organized crime syndicates. In the past, several governmental agencies like the ministry of home affairs, ministry of company affairs, directorate of enforcement, department of revenue, and intelligence agencies had investigated private domestic commercial carrier Jet Airways’ overseas funding sources to ascertain whether the money was a proceed from any organized crime syndicate.81

77

Ibid. See “China emerges as India’s largest trade partner. Retrieved from on 30 April, 2008. 79 See “Beijing-New Delhi row escalates over security clearance for Great Wall Airlines”. Retrieved from http://www.domainb.com/aero/airports/20071213_wall.html>. 13 December 2007. 80 See Puja Mishra’s “Eagle Eye on FDI”. Retrieved from on 12 April 2008. 81 See “Jet Airways under ED scanner. The Tribune, 1 August 2005. Retrieved from on 12 April 2008. 78

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Keeping these issues in mind the government had decided to promulgate an umbrella legislation known as the National Security Exception Act (NSEA) aimed at imposing checks on FDI flows into India.82 The NSEA was based on the lines of the Exon-Florio Act of USA, 1988 that empowered the Committee of Foreign Investment in the US, to prohibit takeover of any American company likely to cause a threat to the country’s security. Such legislations was very common in other countries as well, like England (Golden Share), Mexico (Foreign Investment Law), Canada, Australia, Thailand and China, which have all enacted similar laws to block anti-national activities through FDI. The areas that would come within the realm of FDI screening under the NSEA would include sensitive areas like Kashmir, locations in close proximity to nuclear, space and defense installations and sectors where security concerns have been expressed including aviation, ports, shipping and telecom.83 Finally, national security concerns may have also necessitated the government maintaining the largest fleet of civil aircraft for use in case of a national emergency. The restrictions on foreign ownership of India’s domestic carriers were not only to protect Indian-owned and operated airlines but also to ensure that the government had the largest number of aircraft at its disposal in the event of situations like providing disaster relief and response, war, or evacuation of civilians (Krishna Iyer, 1994). In the past, India’s national carriers had carried out the largest evacuation by a civilian airline, involving evacuation of over 111,000 Indian citizens from Amman, Jordan to Mumbai, India during the first Gulf War by operating 488 flights, during August 13-October 11, 1990, lasting a total of 59 days.84 However, this was made easier because the majority of aircraft in India were owned by the government. It is possible that the desire to maintain a pool of civilian aircraft, which could be commandeered by the government or armed forces of India, may have also influenced the government to maintain nationality restrictions on commercial operations in India. According to Jagjivan Ram, independent India’s first labor minister,

82

See Shardul Thacker’s “India: FDI screening – National Security Exception Act”. Retrieved from http://www.mondaq.com/article.asp?articleid=56896> on 12 April 2008. 83 Ibid. 84 See Air India History: Timeline 1981-1990. Retrieved from on 12 April 2008.

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“From the point of view of Defense requirements, operation of all air services by a State Organization would obviously be the most desirable arrangement as, in an emergency, it would be easier to make arrangements for meeting the requirements of the Defense Services than it would be if the operation of the services were in the hands of private airlines.”

Regarding the requisitioning of civilian aircraft for defense purposes India is not alone. Under the US Department of Defense’s (DoD) Civil Reserve Air Fleet (CRAF) program, US airlines are contractually committed to support the US military in emergencies when the need for airlift exceeds the capability of military aircraft.85 Evacuations like the one seen prior to the Gulf War may again be necessary at some point in the future. In the event of a national emergency, it may be easier for the government to requisition aircraft from Indian-owned carriers than from foreign-owned carriers. Additionally, depending on foreign-based carriers to provide civilian aircraft during times of war may not be appropriate as it may grant leverage to foreign countries that seek to influence India in a time of crisis, thus proving harmful to India’s national security. As such, national security concerns regarding India’s relations with certain countries, the involvement of terrorists and organized crime syndicates, and the desire to maintain a large pool of civilian aircraft for the purpose of responding to national emergencies may have influenced the government in its determination of the process and pace of deregulation of the airline industry. Finally, the government may also have been influenced by the desire to ensure safety in the airline industry. According to the ICAO, aviation safety was the responsibility of individual governments. As the Naresh Chandra Committee report argues, “Aviation safety is paramount and should take precedence over, if not override, commercial considerations in air traffic operations.”86

85

See Civil Reserve Air Fleet. Retrieved from on April 12, 2008. 86 See Naresh Chandra Committee Report on a Road map for the Civil Aviation Sector. Ministry of Civil Aviation, November 2003, p.59.

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The principal regulatory body overseeing aviation safety is the DirectorateGeneral of Civil Aviation (DGCA). It is responsible for, among other things, laying down airworthiness requirements for civil aircraft, licensing of pilots, aircraft maintenance engineers and monitoring of flight crew standards, licensing of aerodromes and air carriers, supervision of training activities of flying clubs, investigation of air accidents and incidents and coordination of all regulatory functions with the ICAO (Ministry of Civil Aviation, Government of India, 2008a). Through the DGCA, the government has maintained an active presence in the airline industry due to the necessity of maintaining aviation safety. As such, a second set of conditioning factors that may have influenced the government’s determination of the process and pace of deregulation of the airline industry includes national security and safety concerns regarding the involvement of terrorists, organized crime syndicates and countries with which India has strained relations in the country’s airline industry, the desire to maintain a large pool of civilian aircraft for responding to national emergencies, and the desire to ensure safety in the airline industry.

Political Culture of India The final set of conditioning factors that may have influenced the government in its determination of the process and pace of deregulation pertained to the pluralist nature of Indian politics. This included issues like the demands and compulsions of coalition and minority government, the impact of interest groups and labor unions, and the role of states of India. The government had followed a policy of phased deregulation of the airline industry. As pointed out before, the ICAO accepted the idea of phased deregulation of airline industries around the world based on the specific needs and environment of each country. However, the government’s desire to deregulate the airline industry was influenced more by the imperative to address the different political pressures that impacted the industry. Such pressures had been part and parcel of India’s democracy since its independence. As Madhavrao Scindia pointed out,

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“When a particular system has been followed for 45 years, and when you are operating in a democracy – we are not working in a vacuum – one should not take a step where the reaction will be so great that it will abort the whole exercise.”87

Earlier, Scindia had voiced similar views regarding the gradual and incremental nature of reforms in the civil aviation sector,

“We have been made to think in a certain way for many years and sometimes if you go too fast, it has an equal and opposite reaction.”88

India’s succession of coalition and minority governments since the late 1980s, and the concomitant demands and pressures associated with it, had led to the choice of gradualism and incrementalism in the implementation of reforms (Ahluwalia, 2002b; Gordon, 1997). Montek Singh Ahluwalia, the current deputy chairman of India’s Planning Commission (responsible for formulation of India’s Five-Year Plans) observed that,

“[t]he advantage of this approach is that it makes it easier to develop a gradually moving political consensus in what is otherwise a highly pluralist and noisy democracy”89

The process and path of deregulation chosen by the government had enabled it to build consensus on reform. However, due to the slow nature of reforms, the benefits of these reforms have also been delayed. Nevertheless, the necessity of accommodating the many different constituencies of the government was a significant factor in the process and pace of deregulation (Joshi, 1998). Similarly, the desire to accommodate the views of certain interest groups and labor unions also played a major role in the government’s decisions regarding the policies 87

See Scindia Interview, “The Tuesday Interview: Airlines are not my babies, The Economic Times (Mumbai), 30 June 1992, p.11. 88 See Interview in Naazneen Karmali and R.S. Venkatesh, “Madhavrao Scindia: Charting a New Course”, Business India, 9-22 December, 1991. 89 See Montek Singh Ahluwalia, “Privatization: From Policy Formulation to Implementation: The View from the Inside,” Fifth Annual Fellow’s Lecture (April 17, 2002), Center for the Advanced Study of India, University of Pennsylvania

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to be adopted as part of the deregulation process (Saraswati, 2001). Lobbying by domestic interests groups played a very important role in determining the government’s strategy regarding the process and pace of deregulation of the airline industry. As an example, in 1994, one of India’s premier industrial houses, Tata Industries, had come out with a proposal to operate domestic scheduled services in association with Singapore International Airlines (SIA). At that time, there were no clear guidelines prohibiting any foreign airline from having an equity stake in domestic carriers, but still the government delayed taking a decision regarding the Tata proposal. After four years of waiting, Tata withdrew its application in frustration. The refusal of the government to accept Tata’s proposal had been attributed to lobbying by other private commercial domestic carriers (Saraswati, 2001). As N. Mohanty, former secretary of the industries, observed “The lobby, which has worked to deter Tata-SIA venture, is an example of malignant lobbying. The lobbyists conveniently used the pretext that Indian Airlines would be affected. But actually they were acting on behalf of certain private airlines that did not want quality competition to be introduced in the domestic aviation sector.”90

Apart from the different interests groups, labor unions also played a major role in the government’s determination of the process and pace of deregulation of the airline industry.91 Of particular significance was the issue of high degree of unionization among the workforce in the airline industry, multiple unionism, the regulations governing terms of employment of state personnel (including airline industry), and the linkages between political parties and labor unions. The strength of any union in bargaining with management is dependent upon the extent of support it commands. Labor unions in India appear particularly strong when measured in terms of union membership (Jenkins, 2004). In some cases, one union covered more than one category of staff, viz. pilots, flight engineers, cabin crew, flight dispatchers (e.g., Air Corporations Employees’ Union). However, the system of multiple unionism was more common in India with labor unions organized along different

90

See Down to one last hurdle? Tata Airline project. Businessline, 30 January 1998. See “Chairman’s Statement”, in Air India, Annual Report 1971-72. Statement by JRD Tata, Chairman of Air India.

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categories (e.g., Air India Aircraft Engineers Association and All India Aircraft Technician’s Association). This tends to create complications for industrial relations.92 For example, concessions granted by management to one union of a particular category may lead to demands by other unions of the same category that the concessions are extended to them as well. Similarly, concessions granted by management to one category of labor unions, may also lead to demands for concessions by other categories. Finally, labor unrest in the larger economy may also tend to spill over into the airline industry. The regulations concerning the terms of employment of state personnel applied to workers of commercial enterprises owned by the state (Ministry of Labour, Government of India, 2008). India’s labor laws stated that workers could not be fired without due cause and the process of proving due cause for removal was a time-consuming process since workers had recourse to court, and India’s judiciary faced a huge backlog of cases, which meant that decisions can take years. This deterred managers from initiating removal procedures. The protection provided to workers by labor unions could sometimes weaken management when they needed to respond to instances of indiscipline. Finally, some of the unions in the airline industry were directly or indirectly tied with political parties, through the major labor unions of the country. The Air Corporations Employees’ Union, one of the most influential and powerful trade union in the airline industry was affiliated with the Center for Indian Trade Unions (CITU), and through it with the Communist Party of India (Nayar, 1994). The major labor unions are associated with four of the six national political parties of India: Indian National Trade Union Congress (with Indian National Congress), Bharatiya Mazdoor Sangh (with Bharatiya Janata Party), Center for Indian Trade Unions (with the Communist Party of India), and All India Trade Union Congress (with Communist Party of India – Marxist). The current Indian National Congress (INC)-led government in India is a coalition government heavily dependent on the support of the Left Front for its survival, of which the Communist Party of India and the Communist Party of India – Marxist are

92

See Lok Sabha. Committee on Public Undertakings (1978-79). Fifty-Third Report: Air India – Commercial and Staff Matters. New Delhi: Lok Sabha Secretariat, 1979a).

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important constituents (Ganguly, 2008). As such, the demands and pressures of labor unions like the Air Corporations Employees’ Union played a significant role in the government’s determination of the process and pace of deregulation of the airline industry. Some individuals have blamed labor unions as being responsible for the problems associated with the airline industry. JRD Tata, who held the distinction of being the longest-serving chairman of Air India from 1953-1977, commenting on the deteriorating performance of the airline maintained that,

“The labour unions became powerful. And soon they found they didn’t have to respect management decision as they could always, and they did, get them changed by going to government secretaries or even to the minister to pass direct order. The rot was inevitable.”93

Finally, and to a lesser extent, the views and demands of the different state governments across India may also have played an influential role regarding the government’s strategy of airline deregulation (Federation of Indian Airlines, 2008a). Although, the responsibility for development of the airline industry rested with the central government and it alone had the funds available to do so, one must not ignore the role of the state governments. The current coalition government at the center draws support from many of the regional political parties that head the government in these states. Therefore, the state government’s actions and views regarding the deregulation of the airline industry are important. Additionally, it is the state government’s responsibility to provide mass-transport facility at affordable cost to the people, to provide education and training to residents of their states to gain employment in the airline industry, and to develop airport infrastructure. According to the policy on airport infrastructure, the state governments were responsible for acquisition of private land and allotment of government land, supply of water and power, provision of sanitation and sewage services, provision of surface access through multi-modal linkages, prevention of environmental pollution, maintenance

93

See the interview in “JRD Tata: An ET Presentation”, The Economic Times (Mumbai), 16 September 1992.

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of law and order, and protection of airports from encroachments and vandalism (Ministry of Civil Aviation, Government of India, 2008e). The Ministry of Civil Aviation, Government of India, liaises with state governments in order to ensure provision of all these essential services and basic facilities. The state government civil aviation secretaries act as coordinating officers for single-point liaison with all the state-level departments and authorities. As such, state governments had an important role to play in the development of the airline industry (Ministry of Civil Aviation, Government of India, 2008e). One way to understand how state government policies had a bearing on the airline industry is to look at the issue of sales taxes levied on aviation fuel sold to airlines. Currently, the state governments levy sales tax at the rate of close to 30%. This means that aviation fuel is priced higher in India than what prevails in the international market.94 If the state governments were to reduce the tax burden on airlines, then the airlines would have more funds to invest in capacity augmentation, which would help in the development of the airline industry and ultimately benefit the consumers. As V. Thulasidas, the current chairman of the Federation of Indian Airlines (FIA), pointed out in his address to the heads of different state governments, “And I do wish to remind you another of the State’s responsibility, that of encouraging industry and enterprise. It is important that the health of Indian industry – of which Airlines and Aviation are a significant part – be also foremost in your mind.”95

The above discussion pointed out the several factors that may have influenced, indeed constrained, the government in its decision to deregulate the airline industry. Established international procedures and practices, particularly the ICAO and WTOGATS provisions, spelled out the regulatory framework that governed international air transport. These provisions allowed individual governments to deregulate their respective

94

See “Improving the financial health of India’s airline industry through reducing the cost of ATF: An issue paper”. Federation of Indian Airlines, 2008b. Retrieved from on 12 April 2008. 95 See address by V. Thulasidas, Chairman, Federation of Indian Airlines at the National Conference on Civil Aviation with State Ministers. Federation of Indian Airlines, 2008a. Retrieved from on 12 April 2008.

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airline industries at their own pace. The government saw merit in these provisions and made its own determination regarding the process and pace of deregulation of the airline industry. National security and safety concerns, while significant in any industry, also influenced the government to maintain an active presence in the airline industry and to regulate the entry of foreign players into it. Although deregulation should logically have meant less government involvement, security and safety considerations in the airline industry necessitated government involvement, particularly in the face of internal and external threats. Finally, India being a democracy, the government had to keep in mind the views of certain groups within the country. In some cases, the government may have been unable to pursue its favored course of action, but it recognized that consensus-building was necessary to implement policy decisions within India’s fragmented political structure. Although, this reduced the pace of deregulation it is likely that it also ensured that the government’s ideas and policies did not generate serious opposition, which may have jeopardized the reforms process.

Summary and Conclusion This chapter outlined the conditioning factors that may have influenced the government in its determination of the process and pace of deregulation of the Indian airline industry. Although these factors may not have motivated the government to deregulate the industry, they may have played a significant role in determining government strategy. As mentioned before, these factors included established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. The purpose of this study was to examine the factors that motivated the government to deregulate the industry. Specifically, what factors motivated the government to deregulate the Indian airline industry? What factors influenced the government in its determination of the process and pace of deregulation of the Indian airline industry? The previous chapter discussed some of the factors that may have motivated the government to deregulate the airline industry airline industry. These factors

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included the desire to promote economic development, improve air services and the international trend towards liberalized airline competition. This chapter outlined the factors that influenced the government in its determination of the process and pace of deregulation of the industry. In order to evaluate whether the motivational and conditional factors asserted earlier played a role in the government’s rationale and strategy regarding deregulation, interviews of government officials belonging to the Ministry of Civil Aviation, Government of India, were conducted. The next chapter discusses the results of the interviews and helps us understand the changes in the regulatory system in the airline industry and the rationale and strategy behind the policies adopted by the government.

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CHAPTER FOUR Government Rationale and Strategy for Deregulation of the Airline Industry in India

Introduction This chapter describes the fieldwork undertaken as part of this study. It presents the results of the interviews of senior officials of the Ministry of Civil Aviation, Government of India. The evidence gathered is used to evaluate the validity of the hypothesis offered in the earlier chapters regarding the motivations and conditioning factors that influenced the government to deregulate the Indian airline industry. This chapter begins with a description of the organization of the airline industry in India. It details the various governmental agencies that are responsible for the administration of the airline industry in India. Specifically, it outlines the organizational structure and describes the basic functions of the Ministry of Civil Aviation, Government of India, which is the primary governmental agency responsible for the administration of the airline industry. Following this, it presents the results of the interviews and summarizes the conclusions.

Organization of the Airline Industry in India The airline industry in India is regulated by the Government of India. The powers conferred to the government in this regard are detailed in the Aircraft Act of 1934.96 The government exercises control over the manufacture, possession, use, operation, sale, import, and export of civilian aircraft within the country through the provisions of this act. According to Section 5 of this act:

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The Central Government may, by notification in the Official Gazette, make rules regulating the manufacture, possession, use, operation, sale, import or export of any aircraft or class of aircraft [and for securing the safety of aircraft operation].

96

Aircraft Act, 1934, Directorate General of Civil Aviation, 2008a. accessed on 20 April 2008.

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Without prejudice to the generality of the foregoing power, such rules may provide for –

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the authorities by which any of the powers conferred by or under this Act are to be exercised;

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the regulation of air transport services, and the prohibition of the use of aircraft in such services except under the authority of and in accordance with a license authorizing the establishment of the service;

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the economic regulation of civil aviation and air transport services, including the approval, disapproval or revision of tariff of operators of air transport services; the officers or authorities who may exercise powers in this behalf; the procedure to be followed, and the factors to be taken into account by such officers or authorities appeals to the Central Government against orders of such officers or authorities and all other matters connected with such tariff.

The Ministry of Civil Aviation and Tourism, Government of India, was created in order to administer the implementation of the rules set forth in the Aircraft Act of 1934. It has since been redesigned and renamed the Ministry of Civil Aviation, Government of India. The latter, located in New Delhi, India, is the nodal ministry responsible for the formulation of national policies and programs for the development and regulation of civil aviation and for devising and implementing schemes for the growth and expansion of civil air transport in the country. Its functions extend to overseeing airport facilities, air traffic services, and carriage of passengers and goods by air. The Ministry also administers the implementation of the Aircraft Act, 1934. As such, the Ministry of Civil Aviation, Government of India, is the apex body governing the airline industry and is under the direct supervision of the Government of India (Ministry of Civil Aviation, Government of India, 2008a).

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The organizational chart of the Ministry of Civil Aviation, Government of India, is outlined in Appendix B. The Ministry is headed by the Minister of State (Independent Charge) for Civil Aviation. The Civil Aviation Secretary is the senior-most bureaucrat of the Ministry and is assisted by one Additional Secretary & Financial Adviser, three Joint Secretaries, seven officers of the level of Director/Deputy Secretary/Financial Controller and ten officers of the level of Under Secretary. The functions of the Ministry are distributed under sixteen sections and one Payment & Account Office (PAO). In addition to framing policies, the Ministry provides guidance to the organizations listed below in the implementation of policy guidelines and also monitors and evaluates their interface with Parliament and other statutory bodies. It also supervises the implementation and organization of special programs of the government, particularly those intended for the underprivileged sections of the population (Ministry of Civil Aviation, Government of India, 2008a). The Ministry of Civil Aviation, Government of India, has under its purview the following organizations: Directorate General of Civil Aviation (DGCA), Bureau of Civil Aviation Security (BCAS), Commission of Railway Safety (CRS), Indira Gandhi Rashtriya Uran Akademi (IGRUA): Air India Limited (AIL), Indian Airlines Limited (IAL), Pawan Hans Helicopters Limited (PHHL), and Airports Authority of India (AAI). (a) Directorate General of Civil Aviation (DGCA): This is the principal regulatory body in the field of civil aviation in India. It is responsible for regulation of air transport services to/from/within India, bilateral and multilateral agreements with foreign countries, the policy pronouncements of the government, registration of aircraft, laying down airworthiness requirements for civil aircraft, licensing of pilots, aircraft maintenance engineers and monitoring of flight crew standards, licensing of aerodromes and air carriers, rendering advise to government on matters pertaining to air transport, processing amendments to regulatory acts, supervision of training activities of flying clubs, investigation of air accidents and incidents, and coordination of all regulatory functions with the International Civil Aviation Organization (ICAO) (Ministry of Civil Aviation, Government of India, 2008a).

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(b) Bureau of Civil Aviation Security (BCAS): The Bureau of Civil Aviation and Security is an attached office of the Ministry of Civil Aviation, Government of India. The Bureau is responsible for laying down the standards of pre-embarkation security and antisabotage measures in respect of civil flights in India. It is responsible for monitoring the implementation of security rules and regulations and carrying out survey of security needs, ensuring that the persons implementing security controls are appropriately trained and possess all competencies required to perform their duties, planning and coordination of aviation security matters, and conducting surprise/dummy checks to test professional efficiency and alertness of security staff and mock exercises to test efficacy of contingency plans and operational preparedness of the various agencies (Ministry of Civil Aviation, Government of India, 2008a). (c) Commission of Railway Safety (CRS): The Commission of Railway Safety deals with matters pertaining to safety in rail travel and operation and for this purpose performs statutory functions laid down in the Railway Act. The main task of the commission is to advise railways executives, through its regulation/inspectional/audit/investigatory functions and thereby assist them in ensuring that all stipulated measures are taken in regard to the soundness of rail construction and safety of train operation. It came under the Ministry of Civil Aviation and Tourism, Government of India, in May, 1967 (Ministry of Civil Aviation, Government of India, 2008a). (d) Indira Gandhi Rashtriya Uran Akademi (IGRUA): It was established in 1985 to bring about improvements in the standards of flying and ground training of commercial pilots in the country. For this purpose, IGRUA utilizes modern trainer aircrafts, audiovisual training aids, and qualified flying and ground instructors (Ministry of Civil Aviation, Government of India, 2008a). (e) Air India Limited (AIL): Air India was established in 1953 under the Air Corporation Act, 1953, to provide international air transport services. It is the national flag carrier of India with a worldwide network of passenger and cargo services. It is now the only state-owned airline in the country, having merged with Indian Airlines in August

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2007. Its main bases are Chhatrapati Shivaji International Airport, Mumbai and Indira Gandhi International Airport, New Delhi (Ministry of Civil Aviation, Government of India, 2008a). (f) Indian Airlines Limited (IAL): Indian Airlines was set up under the Air Corporations Act, 1953. Indian Airlines Limited, or Indian, was India's state owned primarily domestic airline, based in New Delhi. Its main bases are Chennai, Mumbai, Kolkata, and New Delhi. It recently merged with Air India for corporate purposes, though for now, it continues to issue its own tickets (Ministry of Civil Aviation, Government of India, 2008a). (g) Pawan Hans Helicopters Limited (PHHL): Pawan Hans Helicopters Limited was incorporated in October, 1985. The primary objective of the organization is to provide helicopter support services to the oil sector in offshore exploration, operate in hilly and inaccessible areas, and make available charter flights for promotion of travel and tourism (Ministry of Civil Aviation, Government of India, 2008a). (h) Airports Authority of India (AAI): The Airports Authority of India (AAI) is an organization working under the Ministry of Civil Aviation, Government of India that manages all the airports in India. The AAI manages and operates 126 airports, including 11 international airports, 89 domestic airports, and 26 civil enclaves. The AAI was formed on April1, 1995, by merging the National Airports Authority (NAA) and the International Airports Authority of India (IAAI), to create a centralized organization that could effectively manage both the international and domestic airports. Its primary functions include control and management of the Indian airspace extending beyond the territorial limits of the country (as accepted by the ICAO), design, development, operation and maintenance of airports and civil enclaves, construction, modification and management of passenger terminals, development and management of cargo terminals at international and domestic airports, provision of passenger facilities and information system at the passenger terminals at airports, expansion and strengthening of operation areas, like runways, aprons, taxiways, etc., provision of visual aids, and provision of

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communication and navigational aids (Ministry of Civil Aviation, Government of India, 2008a).

Interview Results As mentioned before in first chapter, interviews were conducted with government officials belonging to the Ministry of Civil Aviation, Government of India. This study confined itself to the conduct of interviews with government officials of the Ministry of Civil Aviation, Government of India, because the scope of this study was limited to examining the motivations of the government in deregulating the airline industry. As the primary governmental agency supervising the airline industry, the views of the Ministry reflected official government position. The total number of personnel interviewed as part of this study was two (2). One interviewee belonged to the Domestic Transport (DT) Section of the Ministry of Civil Aviation, Government of India, while the other interviewee belonged to the Central Public Information Office (CPIO) Section of the Ministry of Civil Aviation, Government of India. Two interviews were deemed sufficient by the researcher for the purpose of this study. This was because the respondents were knowledgeable about the two major fields associated with this study, i.e., air transport and airport infrastructure. These officials were knowledgeable about the factors affecting the deregulation of the airline industry in India and provided information to the fullest extent possible under the Government of India’s Right to Information (RTI) Act, 2005, without compromising the national interests of India. The respondents had prepared responses for several of the survey questions in advance of the interviews. The respondents indicated that the information provided by them reflected the official government view and represented the extent to which officials were free to disseminate information. As such, two interviews were deemed sufficient by the researcher for the purpose of this study. The interviews took place in June, 2007. The questionnaire that was used to organize the interviews can be found in Appendix A. All interviews were conducted in English, as it is one of the official languages of India and all respondents possessed adequate reading, writing, and speaking abilities in the English language. The survey

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included questions designed to understand the motivations and conditioning factors behind the government’s decision to deregulate the airline industry in India. These factors related to: (1) Development, (2) Demands, (3) International Trends, (4) International Practices and Procedures, (5) Concerns, and (6) Pressures. The questionnaire was furnished to the respondents in advance of the meeting. In this way, the respondents had the opportunity to discuss with the researcher the precise nature of the information sought. While the researcher encouraged the respondents to provide as much information as possible, the final determination regarding the extent of information to be provided was left to the respondents. It must to be pointed out that both the respondents expressed their inability to provide answers to questions that had some bearing on future policy decisions of the government. In addition, both the respondents hesitated to answer questions regarding the political pressures affecting the airline industry. Finally, while both the respondents were receptive to the request for interviews, they expressed reservations regarding the sound recording of their interviews. Keeping in mind the respondents’ concern about providing information that had bearing on future policy decisions of the government and due to the sensitive nature of the airline industry, some of the questions were adjusted so that the respondents could provide information to the fullest extent possible. For respondents who hesitated to answer questions regarding political pressures, the researcher made it clear to them that they did not have to answer any questions that made them uncomfortable. With respect to reservations expressed regarding sound recording of interviews, the researcher agreed not to record their interviews on tape, but instead took notes. For reasons of confidentiality (required by the Institutional Review Board (IRB) for Human Subjects Research at Miami University, Oxford, Ohio, USA), the names and titles of the individuals who were interviewed are not disclosed. Instead, the interviewees are identified by the term “senior government official of the Ministry of Civil Aviation, Government of India” belonging to the Domestic Transport (DT) Section and the Central Public Information Office (CPIO) Section. All respondents were told that this method would be used for noting who had participated in the survey. Everyone stated that they were comfortable with this procedure.

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The results of the interviews are organized according to issue. Following the presentation of the results, the hypothesis offered was evaluated.

Development This category of questions investigated what impact, if any, the desire to promote economic development had on the government’s decision to deregulate the airline industry. The desire to promote economic development included such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce, promotion of tourism, and attracting foreign investment in the airline industry. When asked if the desire to promote economic development had any impact on the decision of the government to deregulate the airline industry, both the senior government officials of the Ministry of Civil Aviation, Government of India, stated that the desire to promote economic development was one of the primary motivations behind the government deregulating the airline industry. The official from the DT Section pointed to India’s history of a strongly nationalist posture towards economic development. The official mentioned that in the past the government had adopted socialist-oriented economic policies. Several key industries were nationalized as part of this economic regime. The public sector was the dominant entity in India’s economy. The airline industry had been nationalized as part of this economic strategy. The official from the CPIO Section claimed that the deregulation of the airline industry was part of a broader shift away from such policies, which had brought relatively slow growth rates compared to other developing countries in the Asia-Pacific region. Since the late-1980s and early-1990s, the government had decided to liberalize the Indian economy. Deregulation of the airline industry was part of this broader economic liberalization agenda. Both the senior government officials of the Ministry of Civil Aviation, Government of India, stated that an important component of the economic liberalization process was the promotion of exports to other countries. However, good international air connectivity was necessary to boost exports. India’s national carriers did not have adequate aircraft to fly to important export destinations around the world. As such, the

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government had decided to deregulate the airline industry by relaxing entry procedures for private domestic commercial carriers and negotiated more liberal international air services agreements with other countries so that foreign airlines could increase frequency/capacity to India. The DT Section official stressed that export promotion was a deliberate strategy adopted by the government to ease the balance of payments crisis that struck India during the early-1990s. Due to the balance of payments crisis, India experienced difficulties in repaying its international loans. At that time, the government decided on export promotion as one of the primary means to address the situation. It felt that this would increase foreign exchange reserves of the country, thus easing the balance of payments crisis. Another reason pointed out by the CPIO Section official for the deregulation of the airline industry dealt with the necessity of stimulating growth and development of the industry. The official stated that the airline industry was a capital intensive industry and the government did not possess adequate funds to invest in the development of the industry. As the government lacked resources, it felt that deregulating the industry would have encouraged private investment and participation. Both the respondents stated that an integral part of the desire to promote economic development included the desire to develop better air connectivity within India. Both officials pointed out that the growth engine of India’s economy – the services industry – was heavily dependent on the existence of good infrastructure within the country. The success of the software, telecommunications, business process outsourcing (BPO), medical tourism, finance, and banking sectors depended on the ready availability of good infrastructure for their growth and development. Such infrastructure included roads, telephones, railway, ports, power, hospitals, schools, hotels, and air transport. Air connectivity was an integral part of this infrastructure. In addition, they pointed out that even manufacturing industries, like electronics, automobile, textile, steel, etc. were dependent on the existence of a modern air transport infrastructure for their development. Attracting foreign investment in these sectors would be easier with the presence of good transport infrastructure. Foreign investment was another way in which the government had hoped to address the balance of payment crisis.

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The government considered foreign investment essential to promote economic development. The DT Section official stated that the desire to promote better air connectivity within India also stemmed from the government’s understanding that trade and travel within the country would boost economic development. Regional imbalances in economic development would be addressed by promoting trade and commerce in geographically remote areas. Better air connectivity would facilitate trade and travel between these regions and the major trading centers of India and other parts of the world. The existence of air links would also bring people living in geographically remote areas closer to the national mainstream and facilitate national integration. Both officials stated that it was the declared objective of the government to develop air links in all parts of the country. For this purpose, the government had issued the route dispersal guidelines, which stated that domestic scheduled airlines had to offer services in the geographically isolated north-eastern parts of the country. Considering the geographical terrain, the government was of the view that air links were the only way to connect the remote north-eastern regions to the other important parts of the country. However, as the respondents pointed out, the national carriers did not have the means to fulfill the government objective of providing suitable air connectivity within India. Therefore deregulating the industry and allowing new players to participate was essential. Another important element in the desire to promote economic development was the desire to improve airport infrastructure in the country. The CPIO Section official stated that the government was mindful of the fact that the successful development of air transport links within the country was predicated upon the existence of adequate airport infrastructure. Without modern airports capable of handling the increased traffic, the benefits of deregulation of the airline industry would be lost. The increased traffic had begun to put a strain on the outdated infrastructure of many of India’s airports. For this purpose, the government had decided to modernize and privatize some of the major airports of the country. Both respondents mentioned that the development of airports were an important element in the overall economic development plan. Airports were necessary to increase air links across the countries, as they not only served as important centers of trade and commerce but also connected India to the rest of the world. For a

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country undergoing economic liberalization, the presence of a modern airport infrastructure is essential. Finally, both the senior government officials of the Ministry of Civil Aviation, Government of India, pointed out that the desire to promote tourism also played an important role in the decision of the government to deregulate the airline industry. One of the ways in which the government had attempted to address the balance of payments crisis during the early-1990s was by encouraging tourism. The tourism industry was recognized as an important foreign exchange earner for the country. The officials stated that, traditionally, India was not one of the top tourism destinations of the world and as such received a relatively small number of tourists. Consequently, the country saw meager tourism receipts in the past. They stated that the government was interested in increasing the number of tourist arrivals in India. However, in order to encourage tourism, the government realized that the first step was to develop better air links between the tourist origin countries (mainly in Europe, North America, and the Asia-Pacific) and India. This was because the majority of tourists to India arrived by air. As the national carriers did not have adequate fleet to mount additional operations to bring more tourists into the country, the government believed that liberalizing air services agreements would encourage foreign airlines to increase services to India and bring in more tourists. Therefore, the desire to promote tourism also motivated the government to deregulate the airline industry. The respondents claimed that, to a lesser extent, the government also wanted to promote domestic tourism and thus there was a need for more flights across the country. For all these reasons, deregulation of the airline industry was considered necessary. As such, both the respondents confirmed that the desire to promote economic development had a significant impact on the decision of the government to deregulate the airline industry in India.

Demands This category of questions investigated, what impact if any, the desire to improve air services had on the government’s decision to deregulate the airline industry. The desire to improve air services included issues and factors like the increased demand for

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air services, poor performance of the national carriers, and the desire to encourage competition. Both the senior government officials of the Ministry of Civil Aviation, Government of India, stated that the increasing demand for air services in India had been another reason for the deregulation of the airline industry. They furnished statistics compiled by the Directorate General of Civil Aviation (DGCA), pertaining to domestic and international passengers, leading up to and beyond the deregulation of the airline industry. These statistics showed that, on an average, the number of passengers has increased by ten million over the last decade and more for both international as well as domestic travel. The officials stated that the government wanted to deregulate the airline industry because the increased demand for air services could not be addressed by the national carriers alone. The government anticipated further rapid increase in number of passengers over the next decade or so, and thus relaxing entry regulations and allowing new private domestic commercial carriers to mount flights made sense. The CPIO Section respondent also stated that Indian Airlines and Air India were finding it difficult to generate profits to fund their growth and expansion. Over the years the government had attempted to subsidize them but still the two national carriers failed to compete with foreign airlines. Air India had lost market share to the foreign airlines and was unable to secure its share of 50% of India’s international traffic. Indian Airlines on the other hand also faced challenges and failed to keep pace with the increased demand. It was incurring losses during the late-1980s, early-1990s, which proved unsustainable in the long-run. One of the reasons for the government deregulating the industry was to allow the two national carriers to raise funds by tapping equity funds in capital markets as the government did not have adequate funds during the early-1990s to assist them. The loss in terms of market share and money prompted the government to deregulate the airline industry. For a country that was being plagued by a balance of payments crisis at that time, subsidizing the two national carriers was difficult. Finally, the DT Section respondent stated that the government wanted to encourage competition in the airline industry so as to benefit the consumers and also increase efficiency standards of the two national carriers. It felt that allowing new private

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domestic commercial carriers would facilitate the growth of the airline industry and cater to the increased demand for air services within the country. Both the respondents claimed that following the deregulation of the industry, Indian Airlines’ profit margins suffered initially but had since improved appreciably. They credit this improved performance to the airline being exposed to competition. As such, both the respondents confirmed that the desire to improve air services in the face of increased demand and poor services of the national carriers had a significant impact on the decision of the government to deregulate the airline industry in India.

International Trends This category of questions investigated what impact, if any, current trends in the international airline industry had on the government’s decision to deregulate the airline industry. Both the respondents claimed that the government had examined the practice of deregulation of airline industries in countries like the US, UK, Canada, Australia, and Japan. The government looked at entry regulations, routes, fares, and the system of ownership of airlines in these countries. According to the respondents, the government had concluded that deregulation had brought benefits to these countries. The government felt that the deregulation of the airline industry in India would also generate similar benefits. In addition, countries in the Asia-Pacific region had also begun deregulating their airline industry. As the majority of India’s international air traffic involved travel to and from Europe, North America and the Asia-Pacific, the deregulation of the airline industries in these countries had important implications for Air India. The CPIO Section respondent stated that the government felt that the experience of European countries, Australia, and Canada were more relevant to India than the US experience because the former had still maintained public ownership of national carriers and entry, fares, competition, capacity, frequency, and import of aircraft continued to be strictly regulated by these governments. The government was of the view that phased deregulation of the airline industry and partial government control was necessary for the development of the airline industry in India as well.

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Both the respondents stated that the deregulation of the airline industry in these countries symbolized the general trend around the world, which was a move away from regulatory regimes. The number of countries that had deregulated their airline industry since the 1978 US airline deregulation had increased manifold. This situation was expected to continue. Therefore, the government felt that it should prepare the airline industry in India to function in an increasingly deregulated and competitive environment. As such, both the respondents confirmed that current trends in the international airline industry, specifically the deregulation of the airline industry in different parts of the world and the international trend towards liberalized airline competition, had a significant impact on the government’s decision to deregulate the airline industry in India.

International Practices and Procedures This category of questions investigated what impact, if any, international practices and procedures have on the government’s decision to deregulate the airline industry. Established international practices and procedures included the bilateral system of air services agreements, “freedoms of the air”, nationality restrictions, and International Civil Aviation Organization (ICAO) and World Trade Organization-General Agreement in Trade and Services (WTO-GATS) provisions. When questioned whether established international practices and procedures had any impact on the government’s decision to deregulate the airline industry in India, both the senior government officials of the Ministry of Civil Aviation, Government of India, claimed that these practices and procedures determined the process and pace of deregulation of the industry. The CPIO Section official pointed out that while the ICAO, which was the primary international organization regulating air services, encouraged countries around the world to deregulate their airline industry, it allowed individual governments to determine the process and pace of deregulation depending on the existing conditions within their country. According to the ICAO, a process of phased deregulation was quite acceptable and countries around the world had charted different courses in an effort to achieve deregulation. India had deregulated the airline industry keeping in mind the guidelines of the ICAO.

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The CPIO respondent stated that although the government was interested in liberalizing international air services to and from India, it was not willing to forgo the bilateral aviation system set out under the Chicago Convention of 1944. The respondent claimed that while the government re-negotiated several erstwhile bilateral air services agreements and signed more liberal agreements with other countries, it wanted to ensure that Air India did not lose its share of international traffic to and from the country. Both the respondents stated that the only open skies agreement signed by the government since the deregulation of the airline industry had been with the US and there were no plans of the government to conclude similar treaties with any other countries. Only a small percentage of the countries around the world had adopted an open skies regime and fewer still had given up the bilateral system of aviation for a more liberal multilateral system. The government believed that the interests of the Indian airline industry were best served by adhering to the bilateral system of aviation. The respondents stated that the government closely monitored the international air service rights governing air transport between countries, referred to as the “freedoms of the air”. Like other countries, while the government was willing to provide fifth freedom rights (beyond rights) to some airlines, seventh freedom rights (cabotage) were expressly forbidden. As such, while the government was willing to liberalize international air services to a certain extent, it did not want to liberalize more than the current international practice. Both the officials of the Ministry of Civil Aviation, Government of India, stated that the government had also been influenced by established international practice and procedures regarding restrictions on commercial operations based on nationality. These restrictions include cabotage and ownership. Regarding cabotage, the government felt that allowing foreign airlines to operate domestic scheduled services within India would prove harmful to the interests of domestic carriers in India, including the national carriers. As such, the government continued to maintain restrictions on the eighth and ninth freedoms of the air rights. With regard to ownership, the DT Section respondent pointed out that although foreign entities were granted permission to invest in domestic carriers, foreign airlines were not allowed to do the same. In addition, Indian carriers were also required to be

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‘substantially owned’ by citizens of India or non-resident Indians. There were restrictions placed on foreign citizens and companies acquiring stake in India’s carriers. The respondent claimed that the restrictions on cabotage and ownership were in keeping with international practices and procedures as even the US had similar restrictions. These restrictions were meant to protect India’s domestic carriers, including the national carrier, from unfair competition as these airlines were not in a position to compete with foreign airlines or airlines owned by foreign citizens. Finally, the CPIO Section respondent pointed out that air traffic rights were excluded from the WTO-GATS arrangement. The ICAO rules and procedures stated that countries were not required to adhere to WTO-GATS provisions like national treatment and MFN principles that governed other services sector under the WTO-GATS. Air traffic rights were also specifically excluded from WTO-GATS. Therefore, India’s decision to deregulate the airline industry had been influenced by the position adopted by the ICAO and other countries in international forums and was in keeping with established international practices and procedures. As such, both the respondents confirmed that although the government decided to deregulate the Indian airline industry, its determination of the process and pace of deregulation was influenced by established international practices and procedures. Specifically, the bilateral system of aviation, international “freedoms of the air” rights, nationality restrictions, and ICAO and WTO-GATS provisions, were important conditioning factors in the government’s determination of the process and pace of deregulation.

Concerns This category of questions investigated what impact, if any, national security and safety concerns had on the government’s decision to deregulate the airline industry. According to both the senior government officials of the Ministry of Civil Aviation, Government of India, national security and safety were important considerations for the government with regard to the deregulation of the airline industry. The DT Section respondent stated that the government was not interested in removing ownership restrictions because of defense and national security-related issues. The

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respondent did not refer to any requirement by the military for civilian aircraft, but agreed that the government wanted access to a large pool of civilian aircraft in case of emergencies. The government felt that it was easier to requisition civilian aircraft from persons of Indian origin than from foreign citizens. If the majority of aircraft in India were owned by foreign citizens, then fewer planes would be available for use in terms of a national emergency. The CPIO Section respondent pointed out that the national carriers had carried out the largest civilian airlift in history just prior to hostilities breaking out during first Gulf War. The national carriers had evacuated 170,000 of its nationals from Iraq, Jordan and Kuwait, who had been working there. Such a feat would prove difficult to accomplish in a situation where the majority of aircrafts would be owned by foreign citizens. The respondent pointed out that the government was also concerned that some countries could use aircraft ownership as leverage against India. Moreover, both the respondents claimed that the difficulty of allowing foreign ownership becomes clear when we consider that citizens from countries with which India did not share good relations may own stake in India’s domestic carriers. The respondents did not name these countries, but stated that allowing citizens and companies from such countries to participate in a key sector like the airline industry could pose a threat to India’s national security. In addition, allowing foreign ownership in domestic carriers may also lead to terrorists and members of organized crime syndicates acquiring equity stakes in India’s domestic airlines. As such, the respondents pointed out that national security considerations were an important conditioning factor with regard to the deregulation of the airline industry. The DT Section official also stated that the government also had no intention of compromising safety standards in the face of commercial considerations. The ICAO had declared that aviation safety was the responsibility of individual governments. Safety considerations motivated the government to closely monitor the deregulation process. The government monitored the entry, aircraft condition, maintenance schedules, and importation of aircraft. The government had given the responsibility for ensuring the maintenance of aviation safety standards to the Directorate General of Civil Aviation (DGCA).

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As such, both the respondents confirmed that national security and safety concerns were important conditioning factors in the government’s determination of the process and pace of deregulation. Although, the government wanted to deregulate the airline industry, it did not want to relax ownership restrictions due to national security considerations. At the same time, it realized that that the success of the airline industry in India was heavily dependent on aviation safety. For this purpose, the government continued to maintain an active presence in the airline industry, even as it continued to deregulate it.

Pressures The final category of questions examined what impact, if any, India’s political culture had on the government’s decision to deregulate the airline industry. This included issues like the demands and compulsions of coalition and minority government, the impact of interest groups and labor unions, and the role of the different states of India. As mentioned before, both the respondents had expressed some hesitancy in answering questions regarding the political pressures affecting the airline industry. Although they were able to provide some information on this issue, the amount of information provided was limited compared to the other categories of questions. The respondents also refused to comment on whether lobbying in the airline industry encouraged corruption and graft. The respondents agreed that one of the primary reasons for the government pursuing a phased deregulation of the airline industry had to do with the need to address the different political imperatives that impacted the Indian business environment. The respondents pointed to the difficulty in pursuing policy in an environment of successive coalition and minority governments since the late-1980s. The demands and compulsions of coalition and minority governments led to the choice of gradualism in the implementation of reform. This enabled the government to build a consensus on reforms and moderate opposition. The necessity of accommodating the many different constituencies of the government was a significant influencing factor in the process and pace of deregulation.

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The government was frequently lobbied by both foreign and domestic entities with respect to aviation policies. The respondents pointed out that various domestic airlines in India lobbied the government regarding foreign airlines entry and foreign equity participation in the airline industry, and this played an important role in government’s policy regarding ownership restrictions. Some domestic airlines lobbied the government regarding changing the requirements for mounting international flights. Some foreign airlines, governments, and aircraft manufacturers also consulted with the government regarding future policy. The DT Section official acknowledged the desire of the government to accommodate the views and demands of the various labor unions, from time to time. The respondent pointed to some of the recent problems in pursuing the modernization and privatization of the Delhi and Mumbai airports due to opposition from employees belonging to the Airports Association of India (AAI). These employees were concerned about losing their jobs once the airports were privatized. The DT Section respondent pointed to the several labor unions active in the airline industry, the high degree of unionization in the airline industry, multiple unionism, and the linkages between political parties and labor unions as some of the issues that the government needs to keep in mind while determining policy. As such, the government had to develop policy keeping in mind the interests of different groups. Finally, both the senior government officials of the Ministry of Civil Aviation, Government of India, admitted that the state governments played an important role in the deregulation of the airline industry. For example, they pointed out that the state governments were free to assess sales taxes as they saw fit on aviation fuel sold in their respective states to the airlines. This had important implications for the development of the airline industry within the country as fuel constituted a significant portion of the airlines’ operating margins. Both the respondents pointed out that the central government regularly worked with the different state governments regarding aviation fuel supply, air links, airports infrastructure, aviation safety, and other issues and had to cater to the demands of the state governments as well. As such, both the respondents confirmed that the desire to accommodate the views of government constituents, certain interest groups, labor unions, and the different

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states also played a major role in the government’s decision regarding the policies to be adopted as part of the deregulation process. However, they refused to speculate regarding the extent to which these factors impacted the deregulation process or whether such influence was beneficial or harmful for the airline industry.

Summary and Conclusion This chapter described the organization of the civil aviation industry in India and detailed the various governmental agencies that were responsible for the administration of the airline industry in India. The primary governmental agency responsible for regulating the airline industry is the Ministry of Civil Aviation, Government of India. The Ministry supervises several other governmental agencies and the national carriers. It is also responsible for formulating policy regarding safety, security, airports, and air carriers. The government exercises control over the airline industry through the Ministry of Civil Aviation, Government of India. Since the purpose of this study was to investigate the factors that motivated the government to deregulate the airline industry, interviewing senior government officials belonging to the Ministry of Civil Aviation, Government of India, was considered the most appropriate means by which we could test the hypothesis and assertions presented in previous chapters. As the primary governmental agency supervising the airline industry, the views of the Ministry reflected official government position. Therefore, interviews of officials belonging to the Domestic Transport (DT) Section and the Central Public Information Office (CPIO) Section of the Ministry of Civil Aviation, Government of India, were conducted. The interview questions were categorized into six clusters: development, demands, international trends, international practices and procedures, concerns, and pressures. The results of the interviews supported the hypothesis presented in the first chapter. The respondents admitted that the motivations for deregulating the airline industry included the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. The interview results confirmed that such factors as the development of air transport infrastructure, development of air transport links, facilitation of trade and commerce,

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promotion of tourism and attracting foreign investment in the airline industry were important elements in the desire to promote economic development. The interview results also confirmed that the desire to improve air services included issues and factors like the increased demand for air services, poor performance of the national carriers, and the desire to encourage competition. Finally, the respondents admitted the importance of the international trend towards a deregulated airline industry as a significant factor in motivating the government to deregulate. At the same time, the interview results also confirmed that the government’s determination of the process and pace of deregulation was influenced by certain conditioning factors namely, established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. The government was keen to abide by the provision of the bilateral aviation regime, international air services freedom of air rights, and ICAO and WTO-GATS provisions, particularly regarding air traffic rights and ownership. The interview results also confirmed that national security and safety concerns were of significant importance and one of the primary reasons why the government refused to relax restrictions on ownership. Finally, the interview results confirmed the assertion that the political culture of India influenced the government’s strategy regarding deregulation. Although, the respondents were less open regarding answers to this category of questions, they admitted that different interests had to be accommodated by the government as it deregulated the airline industry. As such, the interview results provided substantial evidence to support the hypothesis. In other words, the interview results prove that although the factors that motivated the government to deregulate the airline industry included the desire to promote economic development, improve air services, and the international trend towards liberalized airline competition, the government’s determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics.

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CHAPTER FIVE Conclusion The purpose of this study was to examine the factors that motivated the government to deregulate the Indian airline industry. Specifically, this study attempted to answer the research questions: what factors motivated the government to deregulate the Indian airline industry? What factors influenced the government in its determination of the process and pace of deregulation of the Indian airline industry? In order to answer these questions, this study attempted to understand the policies and outcomes associated with the deregulation process. Through the conduct of interviews of senior government officials belonging to the Ministry of Civil Aviation, Government of India, it attempted to understand the changes in the regulatory system in the airline industry and the rationale and strategy behind the policies adopted by the government. The summary and conclusion from the analyses is presented in this chapter. Additionally, this chapter incorporates a section outlining some of the lessons from India’s experience and some recommendations regarding further deregulation of the airline industry.

Deregulation of the Airline Industry in India The study began by detailing the evolution of the airline industry in India. Since the country’s independence, the airline industry in India was heavily regulated until the mid-1980s. The domestic flag carrier, Indian Airlines, enjoyed monopoly over domestic scheduled air services. The stringent regulations in the airline industry were part of a larger economic policy regime that the government had adopted during this period. This regime favored nationalization of key sectors of the economy, import substitution industrialization, and privileged the public sector in favor of the private sector. The Air Corporations Act of 1953, established the monopoly of state carriers and placed restrictions on the entry of private commercial operators in domestic scheduled air services. However, both Air India and Indian Airlines performed poorly over the next

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few decades. The lack of competition in the domestic scheduled air services sector led to decline in service quality and efficiency of Indian Airlines. At the same time, the lack of capital investment in the airline prevented it from augmenting its fleet. Although, the airline was profitable for the most part during the 1960s-1990s, the rate of increase of profits was minimal. In the case of Air India, the lack of investment in fleet augmentation also led to decline in service quality and poor safety and performance for the airline. Soon, its share in international air traffic began to drop. The primary reasons for the poor performance of both airlines were lack of capital investment, poor labor-management relations, and interference from politicians. During the mid-1980s, it was recognized that Indian Airlines and Air India were having trouble keeping pace with the increased demand for frequency/capacity. Domestic and international air traffic associated with India was increasing at a rapid pace. In order to cater to this demand, the government gradually began easing regulations in the airline industry. It gave permission to air taxi operators to regularize schedules and withdrew the monopoly granted to Indian Airlines for domestic scheduled services within the country. Several new private commercial carriers were established during the 1990s, which began to compete with Indian Airlines. Consequently, the latter faced several challenges in its efforts to remain competitive during the initial stages of the deregulation process. During the early part of this century, several low-cost carriers were also established. These carriers promised to make flying more affordable to ordinary people living in the country. Coupled with deregulation of the domestic scheduled air services sector, the government also entered into more liberal international air services agreements with other countries. Traffic between India and its important trading partners, including US, UK, France, Germany, Dubai (United Arab Emirates), Malaysia, Singapore, and Sri Lanka had begun to increase during the 1990s, but Air India could not cater to this increased demand. As such, the government decided to adopt more liberal international air services agreements with other countries, and Air India faced intense competition from foreign airlines serving similar routes. The deregulation process brought benefits to the consumer. There were more choices available with respect to frequency, routes, destinations, timings, and size of planes. Fares also dropped with the entry of several low-cost carriers into the market.

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Private domestic commercial airlines in India were buoyed by the prospect of rapid increase in air traffic within the country. At the same time, Indian Airlines and Air India, after initial difficulties during the deregulation phase, also improved their performance, particularly with the government investing in fleet augmentation. This study attempted to answer the research questions: what factors motivated the government to deregulate the Indian airline industry and what factors influenced the government in its determination of the process and pace of deregulation of the Indian airline industry? In order to do so, interviews, archival research, and examination of press accounts was conducted regarding the Indian civil aviation sector. Interviews of senior officials in the Ministry of Civil Aviation, Government of India, were helpful in understanding the implications of some of the policies established in the airline industry. In addition, archival research involved the examination of documents pertaining to policies governing domestic air transport, airport infrastructure, bilateral air service agreements, and international civil aviation cooperation agreements were examined. These accounts helped illustrate the involvement of foreign players in the air transport services sector and the civil aviation sector in general. Press accounts gave an indication of elite discussion over the need for reforms in the civil aviation sector, in the context of the changing international environment. These accounts highlighted their views regarding the role the private sector, including foreign actors, in the reforms process.

(a) Motivating factors This study found that the factors that motivated the government to deregulate the airline industry included the desire to promote economic development, the desire to improve air services, and the international trend towards liberalized airline competition. The desire to promote economic development included the development of air transport infrastructure and air transport links, facilitation of trade and commerce, promotion of tourism, and attracting foreign investment in the civil aviation sector. The desire to improve air services stemmed from factors like the increased demand for air services, poor performance of the national carriers, and the desire to encourage competition. Finally, an important motivating factor was the international trend towards liberalized airline competition.

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After attaining independence in 1947, India's policy makers adopted a strongly nationalist posture towards economic development. The government established several public sector enterprises, protected the local private sector, and imposed high tariffs on imported goods. However, these economic policies brought relatively slow economic growth. When compared with the developing countries in the Asia-Pacific region, India fared badly. In response to this situation, some piecemeal attempts at reforms had been initiated by the Rajiv Gandhi government during the mid-1980s. However, these attempts could not forestall a major balance-of-payments crisis in 1991. This forced the Narasimha Rao government to open up of the Indian economy during the early-1990s, through the introduction of reforms. The deregulation of the airline industry was part of the larger economic liberalization agenda adopted by the Narasimha Rao government. Civil aviation has a significant impact on economic development. Studies have shown that that the airline industry forms a significant part of the global GDP. Investment and development in the air transport sector also brings net benefits to the larger economy. This is the case for India as well. Due to rapid economic growth, the result of economic liberalization program undertaken by the government, there was increased demand for air services primarily from two sources: exporters and the tourism industry. Both sources offered solutions to the bleak balance of payment situation during this period. Since the government was constrained by lack of resources, which limited its ability to expand the fleets of the two national carriers, it felt that deregulating the industry would encourage private investment and participation. In this way it would address the issue of capital and capacity shortage. The desire to develop good air transport links also played a major role in the government’s decision to deregulate the airline industry. Good air transport links were a necessity for the development of the services industry within the country, which included the Indian software industry, call centers, business process outsourcing, medical tourism, and other services. These sectors were important elements in India’s economic growth. A modern air transport infrastructure, adequate capacity, and flight frequency were also essential to attract foreign investment. The desire to develop the air transport infrastructure within the country was another important factor in the deregulation of the airline industry in India. Poor

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infrastructure and passenger amenities, inadequate ground handling systems, and outdated landing facilities hampered trade and tourism. The issue of adequate airport infrastructure was tied directly with the issue of tourism promotion, air connectivity, and trade. Without an adequate airport infrastructure the government’s goal of encouraging economic development, facilitating trade and transport links (both domestic and international), and encouraging tourism was difficult to fulfill. As such, the desire to develop air transport infrastructure combined with the other motivations of the government with regard to the deregulation of the airline industry. Another important factor responsible for the deregulation of the airline industry was the desire to develop better air connectivity within the country. The government needed to fulfill certain economic goals and social objectives. Facilitating travel and contact between people living in different parts of the country was an essential element in pursuit of the goals of national integration. In developing countries having multiple identities, national integration is an imperative that cannot be ignored. Additionally, India’s geographical terrain necessitated air transport links, particularly to connect the remote regions of the country to the mainstream. The desire to promote tourism also played a major role in the deregulating of the airline industry. The need for foreign exchange to ease the balance of payments crisis during the early 1990s led to fresh thinking regarding the hitherto low-priority tourism industry. A strong linkage existed between the necessity of having good air transport links and development of tourism. The majority of foreign tourists arrived in India by air but India’s restrictive aviation policies, which led to inadequate air transport services into the country, harmed the tourism industry. Deregulating the airline industry was considered an important step to address this problem. It was believed that the deregulation of the airline industry would encourage foreign airlines to increase services to India thus increasing tourist arrivals. Additionally, it was believed that increased capacity/frequency would also benefit domestic tourism. The second set of motivating factors dealt with the increasing demand for air services in India, and had been another reason for the deregulation of the airline industry. The country had seen rapid growth in number of domestic and international passengers in the past ten years and would continue to do so during the next decade or more. The two

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national carriers by themselves were unable to cater to this increased demand because of lack of adequate fleet and poor services. In order to cater to the increased demand for air services, the government has had to deregulate the airline industry. It was recognized that relaxing entry procedures for private domestic commercial carriers was the most suitable solution. Finally, the deregulation of the airline industries in the US, Australia, Canada, UK, Japan, several western European, and Asia-Pacific countries also affected the Indian airline industry. It symbolized the general trend around the world which was a move away from regulatory regimes. Deregulation came to be seen as synonymous with increased competition, lower air fares, profits, and efficiency. The trend of deregulation around the world also motivated the government to deregulate the airline industry in India.

(b) Conditioning factors However, the strategy adopted by the government in pursuit of the abovementioned goals was influenced by several conditioning factors. These factors included established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics. Established international practices and procedures included the bilateral system of air services agreements, “freedoms of the air”, nationality restrictions, and International Civil Aviation Organization (ICAO) and World Trade Organization-General Agreement in Trade and Services (WTO-GATS) provisions. National security and safety concerns included the government’s access to civilian aircraft, India’s relations with other countries, and the impact of terrorism and organized crime, and the maintenance of aviation safety. Finally, an important conditioning factor was the pluralist nature of Indian politics. This included issues like the demands and compulsions of coalition and minority governments, the impact of interest groups and labor unions, and the role of the different states of India. International air transportation is regulated by the bilateral system of air services agreements. Bilateral agreements codify the rights of countries to operate aircraft to and from other countries and is based on the idea of ‘equality of opportunity’, which means

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that each country has a right to 50% of its international traffic. The government’s determination of the process and pace of deregulation was influenced by this bilateral aviation regime. It had been careful to limit the role of foreign airlines in the Indian airline industry. India has also refused to participate in any multilateral system of air services that liberalizes traffic exchange rights to a greater degree than what exists under the bilateral aviation system. Although, the government has re-negotiated some of its bilateral agreements with other countries, which has liberalized international air travel to some extent, the bilateral system still forms the basis of international air services agreements with other countries. The only open skies agreement which India has signed till date was with the US. It has not shown any inclination to enter into similar agreements with other countries. Although the government wanted to encourage greater air connectivity between India and the rest of the world, it was also mindful of the fact that allowing foreign airlines to mount more than their share of 50% flight rights would lead to marginalization of Air India. The government felt that allowing foreign airlines to fly unrestricted to and from India would make it difficult for Air India to compete due to lack of capital, small fleet, and inadequate services relative to foreign airlines. Eventually, the market would be cornered by these foreign airlines and lead to loss of foreign exchange. The government had considered these issues during the process of deregulation. In conjunction with the government’s decision to adhere to the bilateral aviation regime, the government has also been influenced by established international practice and procedures regarding restrictions on commercial operations based on nationality. The restrictions on commercial operations based on nationality take two primary forms: cabotage restrictions and ownership restrictions. With regard to cabotage, the government has refused to concede on the eighth and ninth freedoms of the air rights, which would allow foreign airlines to operate domestic flights within India. The government felt that such a move would be harmful to the interests of domestic Indian airlines as they were not prepared to face and survive such a competition. The government has also maintained restrictions on foreign equity and ownership in India’s domestic airlines. The policies adopted by the government clearly stated that Indian carriers had to pass the ‘substantial ownership’ test, i.e., be owned by Indian

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citizens or non-resident Indians. Foreign airlines were not allowed to invest or own equity in domestic carriers as the government felt that such a move would jeopardize the future growth prospects of the national carriers. The latter would not be in a position to compete with the financial muscle and capacity offered by these foreign airlines. These considerations were of prime importance for the government. The primary international organization regulating international civil aviation is the ICAO. The ICAO accepted the principle of aviation bilateralism and encourages states to abide by them. The international airline industry has worked to exclude air traffic rights from the WTO-GATS arrangement. Countries were not required to liberalize air traffic services under WTO-GATS and were also not required to adhere to the national treatment and MFN principles that govern other services sector under the WTO-GATS. As such, India’s decision to deregulate the airline industry has been influenced by the position adopted by the ICAO and other countries in international forums. A second set of conditioning factors that influenced the government was national security and safety concerns. India has strained relations with a few countries (like China and Pakistan) and the government was concerned about allowing actors from such countries to participate in the Indian airline industry. Sensitive defense and national security considerations regarding such countries have also influenced the government in its determination of the process and pace of deregulation. The threat posed by terrorists and members of organized crime syndicates acquiring a stake in India’s domestic airlines has also influenced the government to tread cautiously on the road to deregulation of the airline industry. National security concerns also necessitated the government maintaining the largest fleet of civil aircraft for use in case of a national emergency. Such a pool of civilian aircraft could be commandeered by the government for use in times of emergencies. This reliance on civilian aircraft for such purposes was another reason why the government was loath to repeal the nationality restrictions. This was because it was unclear whether foreign airlines operating domestic services in India would allow their aircraft to be used for military or civilian emergency purposes. The government’s

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understanding was that it would be easier to requisition aircraft from India-based carriers owned by Indian citizens, rather than from foreign carriers owned by foreign nationals. Safety considerations have also necessitated active government involvement in the airline industry. Safety in the airline industry around the world is the primary responsibility of every individual government. Safety was one of the most important considerations and the government has tried to ensure that this issue was not compromised by commercial considerations. The final set of conditioning factors dealt with the pluralist nature of Indian politics. This has also influenced the government in its determination of the process and pace of deregulation. India has seen a succession of coalition and minority governments since the late-1980s. The demands and compulsions of coalition and minority governments led to the choice of gradualism in the implementation of reform. While this enabled the government to build a consensus on reforms, it also led to delayed flows of benefits. Nevertheless, the necessity of accommodating the many different constituencies of the government was a significant factor in the process and pace of deregulation. Similarly, the desire to accommodate the views of certain interest groups and labor unions, and the different states also played a major role in the government’s decision regarding the nature of policies to be adopted as part of the deregulation process. This study therefore concluded that the factors that motivated the government to deregulate the airline industry include the desire to promote economic development, improve air services and the international trend towards liberalized airline competition. However, the government’s determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics.

India’s experiences: Some observations and recommendations Although the airline industry operates on a global scale and is one of the most important agents responsible for the spread of globalization, it has still to receive the benefits of globalization. Outdated bilateral air services agreements and protective policies adopted by governments all over the world continue to hinder the development of the international airline industry. Even as trade barriers existing between states have

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been reduced, air transportation continues to be restricted. This hampers international trade and commerce. The need of the hour is to implement an international aviation policy that would benefit both airlines and consumers across the world. Making airlines more competitive and lower airfares and better services for consumers should be the primary objective of such a policy. The restrictions inherent in India’s regulatory policies pertaining to civil aviation are an example of the highly regulated nature of the airline industry worldwide. Based on the analyses of the evolution of the airline industry in the country, some basic observations may be made regarding this process. First, it needs to be understood that the primary motivation for deregulation of the Indian airline industry was to stimulate the growth of tourism and address the increased demand for air traffic within the country. In order to do so, the government relaxed entry requirements and capacity for domestic operators. However, due to increased competition, several other policies needed to be amended. The continued growth and expansion of the new entrants required the government to further relax regulations. Once this process got underway, the government found it difficult to control the pace of the deregulation process. The challenge for the government was to make such adjustments as quickly as possible within the constraints that bound it. However, the problem was that often the government did not have sufficient time to deliberate on all aspects of the issue concerned. This was due to the dynamic nature of the airline industry. Second, the importance of India’s national carrier as a tool for economic development and achieving social equity cannot be underestimated. Although the deregulation process, once set in motion, required the government to further relax control over the sector, one of the issues that the government felt strongly about was the protection of the interests of the national carriers. The government tried its best to shield Indian Airlines and Air India from open competition with foreign and domestic private commercial operators. In this effort, the government succeeded partially to the extent that Air India and Indian Airlines have not been swept away by the competition. At the same time, there was still a question mark regarding service quality and competitiveness of the two national carriers.

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Third, even though privatization of the merged national carrier may appear to be a good option in light of the deregulation of the airline industry, the government has steadfastly refused to go down that road. Although, privatization of the national carrier may help improve its financial condition and performance, make management autonomous, and encourage cooperation with foreign airlines, the government felt that it needs time to prepare Air India for privatization. There were no timetables for this process and it can take anywhere between a few years to over a decade. After years of functioning as a state-owned enterprise, management and workers needed to be prepared to make the transition to working for a private commercial enterprise. Resistance from labor unions and other interest groups within and outside the government also made privatization difficult. Moreover, there were several different roadmaps that may be taken towards privatization and careful evaluation is therefore required. Valuation of the assets of the airlines, to prevent shares from being undersold, was also of prime importance. As an initial step, the government has corporatized the two national carriers and exposed it to competition from domestic and international carriers. But privatization, even partial, of the merged Air India may take a long time. The experience of India suggests that the deregulation of the airline industry and privatization of national carriers need not (and does not) always go hand in hand. The primary objective was to prepare the national carrier to face the competition. Fourth, new domestic scheduled airlines in the Indian market have been able to operate relatively successfully even though they have not earned profits for most of the years since they began operating. They have not required handouts, tax benefits or other assistance from the government. Several of these new carriers have entered into partnership with domestic and foreign enterprises from which they have benefited. Cooperative arrangements have been easier to establish in the background of the liberalization of the broader economy. Some of them have even begun flying abroad. Fifth, the lack of adequate airport infrastructure continued to plague India. As mentioned earlier, the initial motivation for deregulation was to stimulate growth in tourism and cater to increased air traffic and not to reform the airline industry. As such, frequency/capacity addition, due to the entry of new airlines, brought benefits for the

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consumer but created certain problems in the long-run. As governments made adjustments to the policy regime to keep pace with the demands of the industry, it allowed little time for planning and development of airport infrastructure. Sixth, the dynamic nature of the Indian airline industry meant that most of the government policies have been reactive in nature. There was little time available to think about the implications of such policies. As such, sometimes seemingly contradictory policies seemed to have been instituted. An example of this would be the open skies agreement, which encouraged foreign airlines to expand services to and from in India, and the foreign investment and equity restrictions, which prevented these foreign airlines from increasing their presence in the Indian market. Seventh, the lack of adequate airport infrastructure was the result of lack of funds on the part of the government. The lack of funds is a very important constraint facing any government that decides to deregulate air transport services. The government has attempted to address this issue by inviting foreign investment in airlines, airport infrastructure, and air traffic control. However, it has had to balance the need for investments with its desire to retain control over the industry. Eighth, the deregulation of the airline industry has been a boon for consumers. As airlines faced cut-throat competition on several routes, consumers benefited from increased frequency, capacity, and lower air fares. The development of low-cost carriers in India was the result of the relaxed regulations. Deregulation has therefore brought tangible benefits for the consumer and assisted in the development of tourism and trade. Finally, it needs to be realized that despite the deregulation of the airline industry, the government continued to exercise a lot of control over the airline industry. Therefore, some would argue that what we have seen is only partial deregulation. It is because of this partial deregulation that problems such as lack of adequate airport infrastructure, lack of funds, lack of well thought-out plans, restrictive foreign investment and equity policies, and inefficient state carriers continue to exist. India’s experience of deregulation of the airline industry offers some important lessons for other developing countries embarking on a similar venture. Although the path adopted by these countries may not be (and should not be) similar to India, there are several important issues that need to be kept in mind. Most importantly, governments

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need to understand that, following the initiation of the deregulation process, a lot of time would be spent addressing some of the outcomes of this process. For the most part, there is little time and scope for innovations or planning on a long-term basis. Developing countries would do well to realize that the deregulation of the airline industry is intimately associated with issues like the changing structure of the economy (transition from a planned economy to a liberalized economy), the role of foreign players (to what extent should foreign players be allowed to participate in air transport services), and ownership issues (who will have ownership of the state-owned air carrier, the airports, the private commercial domestic carriers). Deregulation of the airline industry is also intimately associated with expanding role of markets, private capital, reform of stateowned enterprises, bureaucratic reorganization, decentralization, and globalization. As such, deregulation of the airline industry works best in an environment where broader economic liberalization process is being encouraged. In conclusion, some observations with regard to the issue of foreign investment and equity participation in Indian domestic carriers by foreign airlines are offered here. The present set of restrictions regarding such ventures in the airline industry has been documented earlier in this study. Admittedly, restrictions regarding foreign investment and equity participation in domestic carriers by foreign airlines are widely prevalent across the world, including in the US. Nevertheless, it may be counter-productive for India to adopt such stringent policies. The airline industry is a highly capital intensive industry and access to capital flows is extremely crucial for airlines looking to expand. Foreign investors have access to a larger pool of capital and greater capacity to absorb losses associated with long-term investment risk. Furthermore, they also provide access to new technologies and bring greater experience and understanding regarding the airline industry. Foreign airlines should not be ruled out as a source of investment. These airlines are a source of capital for domestic airlines, which may assist the latter in their growth and development and bring mutual benefits for both sides. The argument that it is not in the national interest of the country to allow foreign investment makes little sense. Arguments citing perceived threats to national security in the event that foreign airlines are allowed to operate within India also seem illogical. Other countries have allowed

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foreign investment and equity participation in their domestic airlines by foreign carriers and have not suffered significant threats to their national security. Moreover, if the government can invite foreign capital in telecom, insurance, consumer goods, banking, etc. sectors then why make an exception for aviation? The government need not necessarily allow 100% equity participation by foreign airlines in domestic carriers. Instead, as an initial step, the government can allow foreign airlines to acquire a small stake in domestic carriers. The maximum permissible limit can be set by the government. The government should then carry out periodic evaluation of the costs and benefits of such a policy. Depending on the outcome of such an evaluation, the government should decide the future course of action. The protection of the interests of the national carrier should not be the sole consideration. The reason for the poor performance of the national carriers over the years has been the deterioration in service quality compounded by a small and ageing fleet. Restricting foreign airlines from the domestic aviation market will not help in solving the basic problems associated with the national carriers. Unless these core problems are addressed, no amount of regulations will protect them from incurring sustained losses. Consumers will not benefit unless competition is allowed in the domestic scheduled services sector. Corporatization of the national carriers appeared to be part of the initial steps taken by the government to make the airlines more competitive. The next step may involve the privatization of the merged national carrier. The empirical evidence suggests that the impact of privatization on airlines performance is mostly positive. Sales, net income, total assets, capital expenditures, and dividends increase, while efficiency and yield performance improve after privatization. Also, there seems to be an increase in the size of employment after privatization (Al-Jazzaf, 1999). Similarly, other studies indicate that the performance of private sector carriers is better than carriers with mixed ownership and public sector carriers (Backx, Carney, and Gedaljovic, 2002). In conclusion, the government should take a more holistic view of the demands of the airline industry and the needs of the consumer and the broader economy in general. Unless the national carrier is exposed to competition, it will not be able to function effectively and continue to be a burden on the country’s finances. As such, it is in the

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interests of India to further deregulate the airline industry, but to do so in a phased manner, keeping in mind the demands, compulsions, and constraints that are an integral part of its political and economic system.

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Appendix A: Questions for Deregulation of Airline Industry in India Survey I. Development: Q.1: What impact, if any, did the desire to promote economic development have on the government’s decision to deregulate the airline industry?

Q.2: What impact, if any, did the desire to modernize airport infrastructure and ground services handling have on the government’s decision to deregulate the airline industry?

Q.3: What impact, if any, did the desire to develop air transport links have on the government’s decision to deregulate the airline industry?

Q.4: What impact, if any, did the desire to facilitate trade and commerce have on the government’s decision to deregulate the airline industry?

Q.5: What impact, if any, did the desire to facilitate tourism have on the government’s decision to deregulate the airline industry?

Q.6: Is the government interested in attracting Foreign Direct Investment (FDI) in the Indian airline industry?

Q.7: Is Foreign Direct Investment (FDI) allowed in the Indian airline industry? If so, are there any conditions or restrictions attached to it?

Q.8: What policies have been put in place by the government to attract Foreign Direct Investment (FDI) in the airline industry?

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II. Demands: Q.1: What impact, if any, did the desire to improve air services have on the government’s decision to deregulate the airline industry?

Q. 2: How was the performance of Indian Airlines and Air India in the pre-deregulation period?

Q.3: How was the performance of foreign airlines compared to Indian Airlines and Air India in the pre-deregulation period?

Q.4: What role, if any, did the desire to enhance competition in the airline industry have on the government’s decision to deregulate the airline industry?

III. International Trends: Q.1: What impact, if any, did trends in the international airline industry have on the government’s decision to deregulate the airline industry?

Q.2: Did the government study the experience of any of the countries that had deregulated, or were in the process of deregulating, their respective airline industries?

IV. International Practices and Procedures: Q.1: What impact, if any, did international practices and procedures have on the government’s decision to deregulate the airline industry?

Q.2: What is the primary system of determination of international air services between

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two countries?

Q.3: Are there any restrictions on commercial air operations in to/from/within India?

Q.4: Is the private sector in India allowed to operate domestic and international scheduled services?

Q.5: Is the government pursuing any policy, or set of policies, aimed at enhancing the role of the foreign players in domestic air transport services?

Q.6: Are there any rules established by international organizations regarding regulation of air transport services between countries?

V. Concerns: Q.1: What impact, if any, did national security concerns have on the government’s decision to deregulate the airline industry?

Q.2: What steps did the government take to address these national security concerns?

Q.3: What impact, if any, did aviation safety concerns have on the government’s decision to deregulate the airline industry?

Q.4: What steps did the government take to ensure that safety standards were adhered to during the deregulation process?

VI. Pressures: Q.1: What impact, if any, did the nature of Indian politics and its political system have on

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the decision of the government to deregulate the airline industry?

Q.2: What impact, if any, did interest groups have on the decision of the government to deregulate the airline industry?

Q.3: What impact, if any, did labor unions have on the decision of the government to deregulate the airline industry?

Q.4: What impact, if any, did individual states within India have on the decision of the government to deregulate the airline industry?

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Appendix B: Organization of the Ministry of Civil Aviation, Government of India

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