It’s Time Govt Admits, It Does Not Know How to Run Air India


In yesterday’s column on Air India I made a rather silly mistake, which I want to correct here. For the year 2015-2016, the government run airline made an operational profit of Rs 8 crore.

Using this data point, I said that for 2015-2016, the government wouldn’t have to pour any more taxpayer money into Air India. This is incorrect primarily because I assumed operational profit to be the same as net profit.

Anyone who has studied Finance 101 knows that operational profit and net profit are two different things all together. Operational profit is the profit that a company makes from its business operations. After this, the company needs to pay interest on its debt, as well as taxes to the government. What remains is the net profit.

While I shouldn’t have made a silly mistake like this, I am glad I did because it allowed me to dig deeper and come across some more data, which makes my point even stronger. This data came from two written replies that the minister of state for civil aviation Mahesh Sharma recently provided to the Lok Sabha.

In 2015-2016, Air India made a net loss of Rs 2,636 crore. This means that between 2010-2011 and 2015-2016, the airline has made a total loss of Rs 34,689.7 crore. And that is not a small amount by any stretch of imagination.


YearLoss (in Rs crore)
Source: Public Sector Enterprises Survey and Ministry of Civil Aviation


Given the loss of Rs 2,636 crore, this means that the government would have had to pour money into Air India in 2015-2016. In fact, until March 2016, the government had already poured Rs 22,280 crore into Air India. For 2016-2017, an equity infusion of Rs 1,713 crore has already been approved.

The question to ask is how has the airline managed to bring down its losses to Rs 2,636 crore from Rs 5,859.1 crore in 2014-2015? The minister of civil aviation Ashok Gajapati Raju, told the Lok Sabha that the airline was able to cut operational expenses by almost 11% during the course of the year and that helped it run an operational profit of Rs 8 crore.

That is just a part of the answer and a very minor part to boot. Let’s look at some more numbers

Air India2012-20132013-20142014-20152015-2016
Total revenue18,213.7920,140.5920,606.2721,315
Total expenditure23,703.9526,420.1926,466.1823,951
Net Loss-5,490.16-6,279.6-5,859.91-2,636
(in Rs crore)
Source:  From a written answer provided by Mahesh Sharma, the minister of state for civil aviation, to the Lok Sabha.


As can be seen from the above table the total revenue of Air India has been growing at a very slow pace since 2012. In fact, between 2014-2015 and 2015-2016, the airline managed to increase its sales by just 3.4%.

This isn’t surprising given that it continues to lose market share. In 2013-2014, Air India had a domestic market share of 19%. Since then, it has fallen to 16%(as of February 2016). The airline continues to have a brand image problem and is the airline of preference of a very few people.

That apart, the airline has managed to bring down its expenditure by 9.5% or by Rs 2,515.2 crore, between 2014-2015 and 2015-2016. The question is how has this happened? The simple answer to this lies in the fact that jet fuel prices have fallen during the course of the last financial year and the airline has benefited tremendously because of it.

As I had mentioned in yesterday’s column, in May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

Further, a March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

What does this mean? The company saved Rs 2,500 crore because of lower fuel costs. And how much did the total expenditure of the airline fall by? Rs 2,515.2 crore, as I calculated earlier in the column.

Hence, the expenditure of the airline has fallen primarily because of lower fuel prices. And this has allowed it to make lower losses and at the same time make an operational profit. The numbers make me wonder what operational efficiency was the civil aviation minister talking about.

Further, lower fuel prices are not within the control of the airline. And as soon as prices start to go up, the airline’s losses will start to increase as well. And the meagre operational profit will turn into a loss.

In his reply to the Lok Sabha, minister of state for civil aviation, Mahesh Sharma, has offered a range of reasons as to why Air India makes losses. High fuel prices are one reason. This impacts all airlines and not just Air India. If high fuel prices were an issue, how did Indigo make profits all these years? Further, this cannot be reason for 2015-2016, when jet fuel prices have fallen dramatically.

Sharma also offers other reasons for the non-performance of the airline. One reason offered is high airport usage charges. These charges are not just borne by Air India, other airlines shell it out as well, which in turn is recovered from the end consumer.

Sharma then tells us that competition from low cost carriers is another reason why airline is losing money. But this is true about all other airlines which are operating. The competition is not just specific to Air India.

This also brings out another important point regarding competition and the lack of success of public sector enterprises. As Dwijendra Tripathi writes in The Oxford History of Indian Business: “The profits before interest and taxes as the percentage of capital employed in the public sector remain on an average very low…Few of the profit-making units were operating in a competitive framework; the bulk of the profits came from companies operating in sectors in which the public sector employed a near monopoly position.”

This is a point made in the latest Economic Survey as well. As it points out: The Indian aviation and telecommunication sectors of today are unrecognizably different from what they were 20 years ago, with enormous benefits for the citizens. Public sector companies now account for a small share of the overall size of these sectors.”

Long story short—when public sector enterprises face any sort of competition from the private sector, their best days soon get over. Air India is a brilliant example of that.

Sharma in his reply also blames the weakening of the Indian rupee for extreme losses. Jet fuel has to be imported and if the rupee weakens against the dollar, the cost of jet fuel also goes up. Nevertheless, this is a risk faced by every airline in the world which does not earn a major portion of its revenues in dollars, and is not just specific to Air India. Also, there are ways an airline can go about hedging these risks.

The point being that Sharma comes up with many reasons except for the fact that the government does not know how to run an airline. Or should a government be running an airline in the first place? Well, if it can make condoms, it can sure run an airline.

And honestly, any other minister, in his place, would have come up with the same set of excuses. The fact of the matter is that a civil aviation minister without Air India coming under him, would essentially be rendered useless.

To conclude, as I said yesterday, the Rs 8 crore operational profit, will be used as an excuse to show the revival of the airline and keep it running. Nevertheless, as soon as fuel prices start to go up, losses will increase. The taxpayer will continue to bailout the airline.

Rest assured!

The column originally appeared in the Vivek Kaul Diary on Equitymaster

Air India Has Turned Profitable and That’s Got Me Worried


Air India, the airline owned and run by the government, has made an operational profit of Rs 8 crore during 2015-2016.

The minister of civil aviation, Ashok Gajpathi Raju, said this in the Lok Sabha last week. The airline was able to cut operational expenses by almost 11% during the course of the year, the minister added.

For an airline which has been facing huge losses over the years, this is good news. Take the look at the following table.

YearLoss (in Rs crore)
Source: Public Sector Enterprises Survey32053.7

Between 2010-2011 and 2014-2015, the airline faced total losses of a whopping Rs 32,053.7 crore. In fact, even in 2015-2016, the airline is expected to make a net loss of Rs 2,636 crore, though operationally it has made a profit.

Having said that, an operational profit of Rs 8 crore will now be used as an excuse to keep the airline running. In the years to come, more money is likely to go down the drain in trying to keep the airline up and running. In fact, the minister of state for civil aviation Mahesh Sharma told the Rajya Sabha yesterday that the government has no plans of disinvesting Air India.

It is important to ask here as to why Air India made a profit in 2015-2016, after having lost loads of money in the previous years. One reason as Raju pointed out in the Lok Sabha has been operational efficiency.

What the minister did not say was that a major reason for the turnaround has been lower oil prices. In May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

A March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

Further,  the Mint newspaper quotes aerospace journalist Hormuz P. Mama as saying: “I feel that Air India’s improved performance is almost entirely due to the very low jet fuel prices. There does not seem to be much of a turnaround effort in place.”

The jet fuel price is beyond the control of the Air India management. When the price starts to go up again, Air India will be back to making losses. But then the taxpayer is always there to foot the bill. Also, it needs to be pointed out here that as on March 2015, the airline already had a debt of Rs 51,367 crore. The airline was also given a lifeline of Rs 30, 231 crore lifeline by the government in 2012.

Air India is a symbol of all the taxpayer money that the government wastes to keep loss making public sector enterprises going. In fact, when it comes to the quantum of losses Air India is number two behind Bharat Sanchar Nigam Ltd, which made losses of a whopping Rs 8,234.09 crore in 2014-2015. The company has made losses of Rs 23,138 crore between 2012-2013 and 2014-2015.

As the Public Sector Enterprises Survey 2014-2015 points out: “Amongst the top ten loss making companies, Bharat Sanchar Nigam Ltd., Air India Ltd., and Mahanagar Telephone Nigam Ltd. were the top three loss making CPSEs during 2014-15. The top ten loss making companies claimed 85.45% of the total losses made by all the (77) CPSEs during the year. The top three loss making CPSEs namely, Bharat Sanchar Nigam Ltd, Air India Ltd. and  Mahanagar Telephone Nigam Ltd incurred a loss equal to 62.09% of the total loss of all loss making central public sector enterprises in 2014-15.

These losses are borne by the Indian government. In fact, if you look at the table carefully, the fourth largest losses of Rs 2,164 crore were made by a company which makes photo films. Yes, you read it right.

Why should this government or for that matter any government lose more than Rs 2,000 crore in a year, making a product, which doesn’t have any utility left in this day and age? I really don’t have an answer for that.

It isn’t exactly that the government of India is floating around with a lot of money at its disposal. To give you a sense of comparison, India’s agriculture budget in 2015-2016 was Rs Rs 15,809 crore. This was lower than the total losses faced by the seventy-seven public sector enterprises.

In fact, it was lower than the total losses of Rs 16,987 crore faced by the top three loss making enterprises—Bharat Sanchar Nigam Ltd, Air India and Mahanagar Telecom Nigam Ltd. Now who needs more money? Indian agriculture or the few lakh employees employed by these loss making firms?

Hence, the government spends thousands of crores of rupees every year to keep running the loss-making companies, in order to sustain the livelihood of around 2.5 lakh people working in these companies.

The question is why is the government mollycoddling 0.02% of the nation’s population, when the money going towards sustaining the losses of these companies can easily be better utilised somewhere else.

This is basically a crime in a country as poor as India is. As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads To Disaster: “As a society grows richer it can afford more illusions, more entertainments, more re-distribution of wealth, more regulation, higher taxes, and more unproductive people.”

Right now India cannot afford the huge bunch of unproductive people working at public sector enterprises being subsidised by the government. Further, every rupee that goes towards sustaining these companies is taken away from something else.

Of course, loss-making or not, every minister likes a few public sector enterprises under him. Take the case of the Civil Aviation minister, how much value would he have with Air India not continuing to be government owned? Or how much value would the telecom minister have without MTNL and BSNL, the two government owned telecom companies, continuing to be government owned.

Hence, understandably there is a resistance at the level of ministers in the government as well as bureaucrats, to the entire idea of privatisation. But then in economics there are no free lunches, and someone has to pay for it.

Postscript: In the original column I had said that an operational profit of Rs 8 crore would mean that the government will not have to pump any more money into Air India. That is incorrect. The airline has made a net loss of Rs 2,636 crore in 2015-2016, which means taxpayer money will go into the airline and which actually makes the situation much worse, with almost all the drop in losses coming in from the savings on fuel costs.

The column originally appeared in the Vivek Kaul Diary on May 11, 2016

Why the govt should not be rescuing SpiceJet

SpiceJet_Boeing_737-900ER_Vyas-1SpiceJet has approached the government for financial help. The top officials of the airline met the Minister of State for Civil Aviation Mahesh Sharma, a couple of days back.
“We have given no assurance to SpiceJet. We will take a final decision keeping wider interest of passengers in mind,” Sharma told the press after the meeting. He also said that the request for financial help would be put before the petroleum and the finance ministries, as well as the prime minister’s office.
A newsreport in The Times of India suggests that the officials of SpiceJet told Sharma that the airline had an immediate cash requirement of Rs 1,400 crore and an overall requirement of Rs 2,000 crore.
The airline, like Kingfisher before it, owes money to employees, airports and oil companies. Over and above this there are statutory dues that remain unpaid. The airline has provided a guarantee that it would clear the dues worth Rs 200 crore that it
owes the Airports Authority of India (AAI),
which operates most airports in the country.
Yesterday the government allowed SpiceJet to book tickets up to March 31, 2015. Earlier, the airline wasn’t allowed to
book tickets beyond thirty days.
This will help the airline in two ways. First, it can honour the bookings that it had made earlier and will not have to cancel these bookings. Cancelling the bookings would have meant paying back the customers who had booked tickets, and this would mean outflow of cash for the airline. The airline is currently running short on cash.
Secondly, the airline can make fresh bookings and in the process raise some money. It will be interesting to see if the airline uses this opportunity to announce flash sales. This is how the company has been operating this year.
A report in The Hindustan Times quotes an unnamed expert as saying: ““In a bid to raise working capital, the airline started frequently coming up with flash sales. It was their desperation to raise working capital as they waited for an investor.” In a bid to shore up its working capital the airline has announced over 25 sales this year.
It will be interesting to see if consumers book seats on SpiceJet given that in the last few months the airline has used what aviation industry insiders term as the “Christmas tree” option. This essentially means that the airline is taking out spare parts from its aeroplanes and using them for other planes in its fleet. Long story short: it doesn’t even have the money to pay for spare parts. So, the question will consumers feel comfortable travelling in such an airline?
Further, the government also allowed the airline to operate for another 15 days without paying up the Rs 200 crore that it owes AAI and Rs 80 crore that it owes to other companies operating airports in the country. The company also owes Rs 14 crore to oil marketing companies.
The Times of India report quoted earlier goes on to suggest that the government may be working out a “’revival package’ for SpiceJet as it fears shut down of yet another big airline after Kingfisher — both poor companies of rich promoters — ‘will send a bad signal globally’.”
Another PTI report suggests that the government may request banks to give loans of up to Rs 600 crore to SpiceJet, so that it has enough money to keep operating.
If the government does anything like that it will be setting a bad precedent by building in moral hazard into the system. As economist Alan Blinder puts it in 
After the Music Stopped : “ [the]central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”
A very good example of this in an Indian context is Air India. Its employees know that the government will not shutdown the airline and keep pumping money into it, and given that they have very little incentive in turning it around.
While this is not the only reason for the disastrous performance of Air India, it remains one of the major reasons. Its employees know that the government will not shut-down the airline because the politicians need their free airline rides at the end of the day and that is only possible with Air India around.
The airline made a loss of Rs 5,400 crore in 2013-2014. During this year the airline will see a total capital infusion of Rs 6,000 crore from the government. Such capital infusions have become a regular feature of Air India’s survival kit. The airline also has a total debt of close to Rs 40,000 crore.
One look at these numbers tells us that SpiceJet’s requirement of Rs 2,000 crore is rather small in comparison. Nevertheless, it is important to point out here that once bailouts start they can’t be scaled back, as central banks all over the world realized in the aftermath of the financial crisis.
Further, if the government chooses to rescue SpiceJet, after this every airline in trouble will expect to be rescued by the government and so might other companies as well. And this is exactly what moral hazard is all about.
Other than encouraging the insiders to take on increased risk, it gives them the impression of the world being a safer place to do business in than it actually is. This is because the firms assume that in case of a crisis, the government will come to their rescue. And this is not good for the system as a whole.
Also, as I have often pointed out in the past, the government isn’t exactly overflowing with money. The tax collections this year have been nowhere as expected. The disinvestment programme is yet to take off. And the fiscal deficit for the first seven months(April to October 2014) of the financial year has already burgeoned to 89.6% of the annual target.
Further, as I had pointed out
in a previous piece on SpiceJet, it is worth remembering that the commercial aviation business is a huge cash guzzler and has led many a capitalist to his ruin. This is not only an Indian phenomenon, it seems to be the case globally. A February 2014, article in The Economist suggests that profits margins of airlines have been less than 1% on average over the last 60 years.
In this scenario, it doesn’t make any sense for the government to rescue SpiceJet. Further if they choose to rescue SpiceJet, they will essentially be rescuing a crony capitalist, who built his main “media” business with the blessings of a political party. This will not be a good thing to project for the government.
It is important to remember here what Raghuram Rajan and Luigi Zingales write in
Saving Capitalism from the Capitalists: “Since a person may be powerful because of his past accomplishments or inheritance rather than his current abilities, the powerful have a reason to fear markets…Those in power – the incumbents – prefer to stay in power.” Even if it means begging the government for a rescue.
Rajan and Zingales further elucidate on this point: “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”
Keeping these points in mind, if the government does decide to rescue SpiceJet, it will be helping another crony capitalist survive without having to face the consequences of his actions. This can’t be good for the government which anyway gives an impression of being close to big business.
To conclude, it is important to remember what the American economist Allan Meltzer once said: “Capitalism without failure is like religion without sin. It doesn’t work.”

The column originally appeared on as a part of The Daily Reckoning, as on Dec 17, 2014.