Business | Aviation
Competition is best impetus for aviation sector
What is the most probable result of a merger of two weak companies? A bigger weak company, for sure.
- Staff Reporter
- Published: 00:00 October 24, 2006
What is the most probable result of a merger of two weak companies? A bigger weak company, for sure.
This simple truth has, in all probability, slipped the mind of the Government of India. The grand alliance between the country's two government-owned carriers is a pointer to that.
The merger of India's international airline Air India and its domestic counterpart Indian is aimed at creating a mega-carrier with a fleet of about 130 aircraft that could compete with global giants such as Singapore Airlines, Emirates and British Airways.
Probably the government took its cue from the successful mega-mergers of KLM with Air France and Lufthansa with Swiss.
It surely speaks a lot about the ambition of India's aviation industry and its attempt to rid itself of its problems by garnering the benefits of economies of scale with the mega-alliance.
But what about the ifs and buts? Last week, civil aviation minister Praful Patel warned airlines employees across all levels that the government will not remain a mute spectator to the goings on in both the carriers.
Praful said he is not very happy with the way the two carriers are performing. Government support is only available to an extent, and, beyond that, the airlines would have to retain their standards of performance, he added.
Far fetched
That is indicative of the huge presence of underperformers in both the carriers.
He has also said the merger will not lead to any job losses. But, going ahead with the mega-merger with a labour force with a low productivity may lead to disaster.
So the government's intention to solve the profitability crisis of the carriers with economies of scale look a bit far fetched.
Moreover, research shows the reasons for most airlines not making profits are not all related to the size of the airline.
The primary causes of airlines suffering include rising fuel prices, additional expenses on security and insurance after the terrorist attacks, deflationary revenues and inflationary costs, and increased competition from low-cost carriers.
The secondary causes include complex pricing structures with too many restrictive conditions, and the highly capital and labour intensive nature of the industry (with huge fixed costs on maintenance of aircraft, IT infrastructure, crew training, etc.). None can be cured with big size.
New committee
The government also announced last week the formation of a committee of a group of ministers (GoM) to look into the merger, to be headed by defence minister Pranab Mukherjee. A grand alliance of the ministers to formulate a merger strategy and carry it out will be the most urgent necessity. Will that be possible?
Prime Minister Manmohan Singh has expressed his full support to the merger, and Praful Patel is planning to complete the merger by the end of the 2006-07 financial year, i.e. March 31, 2007.
After the GoM clears the plan, it would be placed before the Union Cabinet for parliamentary approval. The civil aviation minister has expressed confidence in securing that by December - the basis of such optimism being best known to him.
It's likely, in fact, that the woes of India's aviation sector can be best solved by addressing the problems of each airline on an individual basis. The health of the air carriers need to be restored as soon as possible and government control over them loosened so that they can compete among themselves.
That's the kind of environment the government needs to create. The solution does not lie in attempting to harness economies of scale through merger. It lies instead in competition.
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