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Should the Air India Maharaja Be Awarded His Privy Purse?

There has been little informed debate on the future of the National Aviation Company of India, better known as Air India, which is currently fighting for its future. Easy and dismissive suggestions like privatisation or closure have been advocated with little understanding of the facts on the ground. This article attempts to measure the changes in productivity at the troubled airline and compares its performance with that of the private airlines. There is no question that Air India has been doing poorly, but with a new fleet and rationalisation of costs, it is possible to be optimistic about the future of the airline. India needs a thriving Air India to provide competition to airlines that are growing by mergers and consolidation.

Should the Air India Maharaja Be Awarded His Privy Purse?

R Venkatesan

Merger Objectives

The merged entity of Indian Airlines and Air India with a fleet of 110+ aircraft is one amongst the top 30 airlines globally and one among the top 10 in Asia in terms of size. The merged entity was expected to result in synergy benefits in the areas of

There has been little informed debate on the future of the National Aviation Company of India, better known as Air India, which is currently fighting for its future. Easy and dismissive suggestions like privatisation or closure have been advocated with little understanding of the facts on the ground. This article attempts to measure the changes in productivity at the troubled airline and compares its performance with that of the private airlines. There is no question that Air India has been doing poorly, but with a new fleet and rationalisation of costs, it is possible to be optimistic about the future of the airline. India needs a thriving Air India to provide competition to airlines that are growing by mergers and consolidation.

R Venkatesan (rvenkatesan@ncaer.org) is a senior consultant with the National Council of Applied Economic Research.

Economic & Political Weekly

EPW
august 8, 2009

T
he National Aviation Company of India (NACIL) was incorporated under the Companies Act 1956 on 30 March 2007 with the objective of synergising activities of the two national carrier’s airlines, Air India and Indian Airlines, to take on the growing competition from the private airlines and large international carriers. Post merger, the new entity is known as “Air India” with the Maharaja retained as its mascot. The Air India “crisis” has been one of the most talked about and debated issue in the r ecent past as the severe cash crunch r esulted in delayed payments of salaries for June 2009 for the first time in its h istory. NACIL, which reported a loss of Rs 2,226 crore on a turnover of Rs 13,638 crore in 2007-08 with a net worth of Rs 5,813 crore1 is expected to register a loss of around Rs 5,000 crore in the last fiscal (2008-09) which would nearly wipe out its net worth. NACIL’s r equest to the central government to i nfuse additional equity and provide soft loans to stay on course has reinforced the economic and financial plight of Air India once again.

Numerous suggestions/reactions that have poured in are biased to suggest that privatisation may be the best solution as public sector enterprises (PSEs) are s upposedly not in a position to compete against their private counterparts and the government should not infuse soft loans and equity in the troubled central public sector enterprise (CPSE). Some have pointed fingers at the troubled m acro-environment for air transportation. Although extensive data and many research studies on CPSEs, the airtransportation sector, etc, are in the public domain, there is no informed debate based on any applied economic/financial analysis. This article is an attempt to fill the void.

vol xliv no 32

route rationalisation, fuel procurement inventory management, handling of flights, redeployment of aircrafts in Gulf and south-east Asia, improved employee p roductivity, etc.

The uppermost question is whether the merger has enabled NACIL synergise the activities of Indian Airlines and Air India. There are many other questions being posed:

  • Has the new Air India been able to take on competition from private airlines? What is the total factor productivity growth (TFPG) of private sector airlines such as Jet Airways and the erstwhile NACIL constituents – Air India and Indian Airlines?
  • What are the labour and capital pro ductivity levels in Air India and private airlines?
  • How are customers being treated and served by Air India vis-à-vis its private s ector counterparts?
  • Should Air India be privatised? Why should government bail out CPSES?
  • Has the macro environment governing the air transportation sector been the c ulprit?
  • What is NACIL’s road map to realise the “economies of scope” from the merger of Air India and Indian Airlines, etc?
  • Fortunately, many of these questions can be answered without ambiguity with the available set of data as well as synthesising insights from recently completed research work.

    Measuring Competitiveness

    Very few studies attempt to measure “competitiveness” at the firm level. The National Manufacturing Competitiveness Council’s recent publication2 on TFPG of CPSEs and comparison of TFPGs of leading CPSES with their leading private sector counterparts is an attempt at such an effort.

    Competitiveness can be perceived/ measured from an economist’s viewpoint as the TFPG or can be perceived/measured from a management accountant’s perception as “Added Value” per unit of sales.

    TFP at the Firm Level

    Explaining increases in output, be it at the national level or at the firm level, is one of the fundamental tasks of economics. After accounting for intermediate inputs, output growth is attributed to growth in labour and capital and improvements in technology. It is the contribution of “technology” after netting out the contributions of l abour and capital that is referred to as t otal factor productivity (TFP).

    There are two kinds of TFPG analysis that have been commonly done for India: at the aggregate level of the gross domestic product and at the level of the manufacturing sector as a whole. For the analysis at the GDP level the main source

    To summarise, the steps followed are:

  • (1) Real VA (Q), real capital (K) and real wages and salaries are calculated by deflating the nominal values by the relevant deflator (Table 1).
  • (2) Average annual rates of growth are
  • c alculated using a semi-log time trend over 2001-06 for real VA

    , real capital K

    (QQ ) (K )

    L

    and labour (Table 1).

    (L )

  • (3) Average labour share (ratio of w ages, salaries and benefits to VA) is calculated for the period 2000-07 (SL) (Table 1).
  • (4) The average capital share for 2000-06 was assumed as 1 minus the labour share in VA (SK).
  • (5) TFPG over the period 2000-07 is c alculated as follows:
  • QKL

    TFPG = − s − s

    Q KK LL

    Analysing Factor Productivity

  • The economic efficiency criterion, viz, TFpg for the private sector airline is around 11%, roughly twice that of the erstwhile CPSE domestic airlines. The fact that this was achieved despite a growth rate of 19% in labour and a 18% growth in real gross fixed assets indicates a healthy growth rate of real value added 30% achieved during the analysis period 2000-07 vis-àvis 2% growth rate in real value added achieved by Indian Airlines.
  • The disturbing trend observed is the “labour share” of over 68% in value added for CPSEs vis-à-vis the 33% “labour share” prevalent in the private sector alternative.
  • Table 1: Computation of Real Value Added, Real Capital, Real Wages and Salaries and Real Turnover for 2000-07

    of data is the National Ac- 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Growth Rate

    counts Statistics (NAS). For Wages and salaries Air India 968 987 1045 1112 1182 1244 1341 -the Indian manufacturing Indian Airlines 982 1120 1074 1154 1215 1141 1389 -Jet Airways (India) 220 232 264 282 375 568 938 1205

    sector there are various es

    CPI-IW Base: 1999-2000=100 103 107 112 116 120 125 134 142

    timates of TFPG available.

    Base: 2001-02=100 96 100 104 109 112 117 125 133

    The basic source of data is

    Real W and S Air India 943 922 936 955 985 993 1002 -

    the Annual Survey of

    Indian Airlines 957 1047 962 991 1012 910 1039 -

    I ndustries (ASI) and the

    Jet Airways (India) 214 217 236 242 312 453 701 848

    analysis is usually done for

    Real PBDITA Air India 629 591 666 409 451 504 364 -

    the aggregate manufactur-

    Indian Airlines 286 167 237 350 364 378 187 -

    ing sector as a whole or for Jet Airways (India) 301 377 303 612 956 1371 1313 1836

    specific industries. Howev-GDP air transportation deflator for VA, sales, etc Air transport deflator used 99.2 106.5 97.7 122.6 113.5 102.6 72.8 54.4

    er, there is nothing in the

    Real value added Air India 1572 1513 1603 1364 1436 1497 1367 --2%

    methodo logy that restricts

    Indian Airlines 1243 1214 1199 1341 1376 1289 1226 -2%

    its use at the firm level in

    Jet Airways (India) 515 594 539 854 1269 1824 2014 2684 30%

    the service sector, and was

    L Share Air India 0.60 0.61 0.58 0.70 0.69 0.66 0.73 -0.65$

    employed by the National

    Indian Airlines 0.77 0.86 0.80 0.74 0.74 0.71 0.85 -0.78$

    Council of Applied Eco-

    Jet Airways (India) 0.42 0.37 0.44 0.28 0.25 0.25 0.35 0.32 0.33$

    nomic Research (NCAER) for

    K Share Air India 0.35$

    the National Manufactur-( =1-L share) Indian Airlines 0.22$

    ing Competitiveness Coun-Jet Airways (India) 0.67$

    cil for manufacturing PSEs. Employees Air India 17205 16612 16068 15572 15914 15884 15376 --2%

    Hicksian Efficiency Index is Indian Airlines 20554 20012 19523 18715 18504 18219 17982 --2% Jet Airways (India) ---6608 7598 8815 11088 13163 19%

    the measure of TFP.

    Real gross fixed asset Air India 6774 6568 6407 6082 5571 6119 6679 --1%@

    TFP is obtained as output

    Indian Airlines 5242 5013 4917 4686 4324 4112 ---5%@

    growth (net of intermediate

    Jet Airways (India) 2279 4519 4761 4441 4107 5245 6850 11885 18%@

    inputs) less growth in la-

    Real sales Air India 5231 4665 5662 5019 6691 8831 11631 -

    bour and capital. Econo-

    Indian Airlines 3823 3541 4168 3778 4699 5621 4104

    mists view this as the

    Jet Airways (India) 2507 2361 2921 2813 3832 5525 9763 16334

    growth due to improvement Total Factor Productivity Growth (TFPG) Average L Share Average K Share TFPG

    in technology. TFP and Hick

    sian Effici ency Index growth Air India 0.65 0.35 -1% Indian Airlines 0.78 0.22 5%

    are obtained as TFPG. The

    Jet Airways (India) 0.33 0.67 11%

    TFpg is an indicator of eco-

    VA growth rate; L growth rate ; $ average; @ K growth rate. nomic efficiency. Source: CMIE Prowess Database, Public Sector Enterprises Survey, National Accounts Statistics, various issues.

    august 8, 2009 vol xliv no 32

    INSIGHT

    Table 2: Real Added Value Per Unit Sales

    Added value is a gross sales and operating turnover/em-

    Real Added Value/Real Sales (Paise Per Rupee Sale)

    measure of TFP based ployees have been considered as appropri

    2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

    on inputs from the fi-ate financial performance variables in the

    Air India -1 -1 0 -4 -2 -1 -3 NA

    nancial statements. redesigned MoU. If you apply the same log-

    Indian Airlines -6 -9 -6 -3 -1 -1 5 NA

    The concept of added ic to compare above alternatives, then it is

    Jet Airways (India) 3 -3 -6 6 14 15 6 4

    value is that wages obvious that capital and labour productivi-

    Table 3: Financial Performance Indicators – Indian Airlines, Jet Airways

    and salaries reflect to ty measures are quite low in the CPSEs al

    and Air India

    2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 a certain extent the ternative vis-à-vis Jet Airways.

    Real PBDIT/real sales (in %) marginal productivity Is the macro environment for Air Trans-Air India 12.0 12.7 11.8 8.2 6.7 5.7 3.1 NA

    of labour. Expenses on portation adversely affecting performance

    Indian Airlines 7.5 4.7 5.7 9.3 7.8 6.7 4.6 NA

    supplies, etc, reflect of domestic airlines?

    Jet Airways (India) 12.0 16.0 10.4 21.7 25.0 24.8 13.4 11.2

    the true value of these

    Real PBDIT/real gross fixed assets (in %) Air India 9.3 9.0 10.4 6.7 8.1 8.2 5.5 NA inputs, assuming no Macro Environment for Air Transporta-Indian Airlines 5.5 3.3 4.8 7.5 8.4 9.2 0.0 NA price distortion. The tion Sector: This can be examined from Jet Airways (India) 13.2 8.3 6.4 13.8 23.3 26.1 19.2 15.4 capital employed earns the NAS the trends in GDP deflators. For Real sales/employees (Rs lakh per employee)

    a return, which is i nstance, the available GDP deflator’s

    Air India 30.40 28.08 35.24 32.23 42.04 55.60 75.65 NA

    equal to the average trends in the ratio of GDP at current mar-

    Indian Airlines 18.60 17.69 21.35 20.18 25.39 30.85 22.82 NA

    cost of capital for the ket prices to GDP at constant 1999-2000

    Jet Airways (India) NA NA NA 42.57 50.44 62.67 88.05 124.09 Real PBDIT/employees (Rs lakh per employee) industry group or an market prices, the GDP air transportation Air India 3.66 3.56 4.15 2.63 2.84 3.18 2.37 NA average of PSE returns sector deflators, GDP road transportation

    Indian Airlines 1.39 0.84 1.21 1.87 1.97 2.08 1.04 NA

    in the economy. The sector d efla tors, etc, can be examined as

    Jet Airways (India) NA NA NA 9.25 12.59 15.55 11.84 13.95

    surplus over and above shown in Table 4.

    Source: CMIE Prowess Database and Public Enterprises Survey, various issues.

    all these returns that Barring two years, 2003-04 and 2004-If roughly two-thirds of value addition is is capital, labour and the supply of inputs 05, the GDP air transportation deflator is on spent on wages and salaries, obviously is the “added value” created. Another in-a downward spiral, unlike other GDP deflathere is little left to earn an acceptable terpretation may be that added value tors in transportation sector or the general i nternal rate of return (IRR) on new measures the contribution to the economy, GDP deflator. This indicates an unsustainai nvestments. if you assume that the “going concern” is ble “price effect”, declining revenue realisa

    ● The negative rate of growth in real broken up and the resources are ploughed tion per seat kilometre as well as the high gross fixed assets at constant 1999-2000 back into other PSEs. In other words, a incidence of fuel and oil cost per seat kiloprices over the periods 2000-07 for both company’s performance is measured by the metre resulting in dwindling value addition Air India and Indian Airlines indicates a ratio of added value per unit sale, which is at current prices. If you adjust for the price poor track record of capital expenditure an indicator of the multi-factor producti-effect, the GDP air transportation at conprogramme. The study on competition in vity or the value added by the business unit stant prices (1999-2000) shows an average the domestic segment of the air transport per unit sale. If we adopt the methodology, annual growth rate of 8.6%. sector by ASCI-Hyderabad 20093 points we have the added value per unit sales out that the non-acquisition of aircraft by both for CPSEs IA and AI as well as the Contribution of Aviation Sector: The conboth Indian Airlines and Air India has p rivate sector alternative Jet Airways. tribution of the aviation sector to the r esulted in CPSEs having overaged fleet in While the observations remain similar, n ational economy is not insignificant. The operation (IA-A 300s of over 22 years, what comes out of this analysis is that the 2003-04 input-output table of CSO lists the

    A-320 of over 13 years and AI with a fleet timing of the merger was Table 4: GDP Deflators – Transportation Sector and Overall GDP Deflator of average age 17 years) in contrast to the suboptimal. Indian Air-Year GDP Deflator GDP Air GDP Road GDP Water GDP of Rail Ratio of GDP at Transportation Transportation Transportation Transportation

    private sector with a fleet of recently lines had started improv-

    Market Prices Sector Deflator Sector Deflator Sector Deflator Sector Deflator a cquired air carriers. ing significantly since to GDP at GDP Air GDP (RT) at GDP (WT) at GDP (Rail T) Constant Transportation Current Prices Current Prices at Current Prices

    2006-07 while the former

    1999-2000 at Current Prices to GDP (RT) to GDP (WT) to GDP (Rail T) TFP Measurement – Added Value Air India’s o perations de-Market Prices to GDP (AT) at Constant at Constant at Constant at Constant 1999-2000 1999-2000 1999-2000

    Per Unit Sale4

    teriorated since 2006-07.

    1999-2000 Prices Prices Prices The TFP of a CPSE was assessed with a Obvi ously, the merger is Prices

    measurement of financial ratio “Added not expected to bring in

    2000-01 104 99 105 118 97

    2001-02 107 106 109 113 95

    V alue” per unit turnover. TFP answers the s ignificant economies

    2002-03 111 98 114 99 99

    question as to what would be the net of scope.

    2003-04 115 123 118 136 102

    profit or loss to the national economy or

    2004-05 121 113 124 162 105

    group of companies if one were to wind Financial Performance

    2005-06 126 103 129 156 109

    up this enterprise or strategic business Indicators: For the trad

    2006-07 132 73 138 156 NA

    unit (SBU) and invest the proceeds in ing and consulting sec

    2007-08 139 54 146 161 NA

    o ther CPSEs or other SBUs. tors, the gross margin/ Source: National Accounts Statistics, CSO, various issues.

    Economic Political Weekly

    EPW
    august 8, 2009 vol xliv no 32

    Table 5: Mean Price of Ticket and Fuel Surcharge and Taxes Component of Fare

    Mean Price for Fuel Passenger Air Traffic (Fuel Surcharge + Tickets Rs/Tkt Surcharge Service Fees Congestion Passenger Service Fees + Rate Air Traffic Congestion Rate) as % of Price

    Kingfisher 5,484 2,700 225 150 56

    Jet Airways 5,559 2,700 225 150 55

    Source: Administrative Staff College of India, 2009, “Study on Competition Issues in the Domestic Segment of the Air Transport Sector in India”, Hyderabad.

    output multiplier for the air transport sector at 2.1 units indicating that an increased output of one unit results in an additional 1.1 units output from numerous other sectors (banking, insurance, hospitality, etc). Literature survey shows that any bottlenecks in the aviation sector adversely affects tourism sector, exports of high value and perishable items, etc. Besides, for a wide and diverse country such as India, aviation plays an important role in connectivity, since road and rail infrastructure costs are extremely high, the aviation sector has the capability to connect far-off places of importance efficiently in a speedy way.

    Income and Price Elasticities of Demand for Air Travel: NCAER5 in a study of the domestic civil aviation had estimated the price elasticity of demand for air travel at 1.26,

    i mplying that a reduction of 5% airfare could result in an increase of 6.34% in r evenue per passenger km. The study had estimated that income elasticity of demand for air travel at 1.36,

    implying that a 5% increase in aggregate income would generate 6.8% increase in demand for air travel, while the recent macro data on aviation sector may not confirm these findings, there are studies to suggest that air travel would be the chosen alternative to visit far-off tourism spots, to facilitate travel of portfolio investors, flow of FDI, etc.

    How Can the Disturbing Trends in GDP Air Transportation at Current Prices Be Addressed? The first step is to bring down airport charges to comparable levels prevailing in the south-east Asian and Gulf c ountries. ASCI in its study on competition policies in the aviation sector estimated the fuel surcharges and taxes at around 55% to 56% during December 2008 when crude prices remained relatively high: Descriptive statistics for price data (Delhi-Mumbai) was collected for peak and non-peak schedules for Jet A irways and Kingfisher (Table 5).

    Discussion with experts revealed that fuel surcharge was high only when crude price prevailed at $135 to 140 per barrel, besides it does not represent any levy but only reflects the cost component variation from the base price of Aviation Turbine Fuel (ATF).

    Table 6: Market Share – Indian Airlines and Air India Domestic (2007-08)

    Year Air India Market Share %
    (Domestic) Formerly Indian Airlines
    2003-04 27.1
    2004-05 27.6
    2005-06 23.2
    2006-07 NA
    2007-08 16.6

    Source: Statistical Division. DGCA – Indian Air Transport Statistics, various issues.

    Experts pointed out that the excise duty on ATF, sales tax levies, etc, are being rationalised and the move is on to integrate these surcharges as part of the fare component.

    (i) If all airport levies are replaced as an ad valorem rate and if duty and taxes on ATF are brought down to the extent feasible, then the aviation sector’s GDP at

    INDIRA GANDHI INSTITUTE OF DEVELOPMENT RESEARCH

    Film City Road, Goregaon (E), Mumbai-400065

    Young Scholars’ Programme 9 to 21 November 2009

    Young scholars in the field of Humanities and Social Sciences interested in Human Development research and teaching are invited to participate in a Young Scholars’ Programme (YSP 6) for capacity development. This is the sixth in the YSP series conducted bi-annually at IGIDR since 2007. The Programme is supported by UNDP and Planning Commission and hopes to build capacity in the broad area of human development. Those who finish their master’s degree (M.A., M.Sc. or M.Phil.) this year or have done so in the preceding three years may apply. Recently appointed college lecturers are also encouraged to apply. We expect to select about 35-40 participants from all over India across various disciplines.

    The Programme will consist of lectures by IGIDR and guest Faculty on a range of topics, discussion groups and individual research, for which library, internet and other advanced facilities will be provided. Participants will be expected to give at the conclusion of the Programme a short presentation along with a 2,000 word essay on a relevant topic of their choice.

    Those selected will be given full boarding and lodging in twin-sharing AC suites at IGIDR, and Rs. 3,000 for incidentals (related to travel) and out of pocket expenses. Three-tier AC travel (including Tatkal charges where necessary) will be reimbursed. Accommodation may also be available before/after the programme in case of travel exigencies. They should arrive latest by 8 November, and not leave before 21 November (evening) at conclusion of the programme.

    Selection will be on the basis of CV and a half page note on your motivation (why you wish to participate). These should be sent by email to: ysp6@igidr.ac.in latest by 30 August 2009. Selected candidates will be intimated in the week commencing 21 September and short-listed candidates offered places as vacancies arise.

    august 8, 2009 vol xliv no 32

    INSIGHT

    Table 7: Average Age of Fleet

    Domestic Indian Airlines Average Fleet Age

    Indian 22 years for A300s 13 years for A320s

    Jet Airways 4.3 years

    Kingfisher 1.8 years

    Air Deccan 4.5 years

    Air India 17.7 years

    Go Air 7.1 years

    Jet Lite (Previously known as Air Sahara) 10.3 years

    Indigo 1 year

    Paramount 3.4 years

    Source: http://www.airfleets.net/ageflotte/index. php?file=rechoper; Extracted from ASCI report, 2009.

    c urrent prices should show a positive u pward trend due to positive and more than unitary price and income elasticies.

  • (ii) There are certain essential air services on routes that are strategically important but commercially unviable which is to be provided with subsidy support. This step would give a fillip to air transportation in a significant manner. “Connectivity” aspects of aviation, high costs of infrastructure provision in alternative modes, make this
  • o ption an attractive one to bring the aviation macro environment back on track.
  • Why Is Air India Consistently Losing Market Share?: The domestic market share (Table 6, p 36) of Indian Airlines since 2003-04 shows a consistent steep d ecline in domestic market share.

    Ageing Fleet: (i) The ASCI report indicates that a major reason why despite having “peak slots” the airline is losing out is the fact that the average age of aircraft in Air India is much higher than its competitors (Table 7). The average age of fleet for the national carrier is 22 years for A300 and 13 years for A320 in sharp contrast to main competitors Jet and Kingfisher have a young fleet of a verage age 4 and 1.8 years, respectively.

    (ii) The second main reason why Air I ndia has been losing “market share” to private airlines is the adverse perception of customers on how they are treated and served by employees of the organisation. For instance, the CEO of a HR training institute said in an informal survey that private airlines score heavily in terms of superior cabin service, baggage handling, utilisation of peak slots and scheduling of flights over CPSEs.

    (iii) A former CEO of Compaq reasoned that economies of scope can only result when cost rationalisation and better employee productivity arise out of merger. He argued,

    Economic Political Weekly

    EPW
    august 8, 2009

    this can happen only through an attractive offering of voluntary retirement scheme (VRS) in CPSEs. The CEO of a private sector engineering firm argued that unless low cost airlines are not discriminated against in terms of not having favourable landing rights in modern airports of Delhi, Bangalore, etc, vis-à-vis full service private sector competitors, Jet and Kingfisher, would tend to gain market share from the “full-service” provider Air India.

    An examination of productivity in terms costs, adopts aggressive marketing p rogrammes, attractive schemes of loyalty programmes, etc, to gain market share. In other words, CPSEs in the aviation sector can improve TFPG significantly.

    The key driving forces arising out of changing demographic trends such as emergence of strong and growing middle class, significant domestic tourism traffic, etc, augur well for the aviation sector. Only the macro environment for the air transportation sector needs to be fine-tuned.

    of employees per aircraft Table 8: No of Employees Per Aircraft-Categorywise (2007-08)

    among full service airlines provides clinching Fleet size Indian Airlines 2007-08 (Now Part of Air India) 72 Air India 2007-08 (Now Part of Air India) 38 Jet Airways 81
    evidence (Table 8). Total no of employees 17,688 15,378 13,203
    The fact that a number No of pilots/aircraft 11 14 13
    of technical employees No of cabin crew/aircraft 21 67 50
    per aircraft in CPSEs is 300 to 400% that of private airlines, while the “cabin No of technical employees/aircraft 73 Market share domestic (%) 15.6 Market share international (%) 8.9 Source: DGCA – Indian Air Transport Statistics 2007-08. 98 2.4 14.8 25 22.0 5.9

    crew” serving customers is a mere 50% of private airlines indicate that the strong union representation is c oming in the way of manpower and cost rationalisation.

    Should Air India Be Privatised?

    Air India’s TFPG is as strong as leading p rivate sector counterparts in similar industry segments.

    In the Public Enterprises Survey, 2007-08, (66 enterprises were analysed), the average productivity gains of CPSEs were found to be high by any standards. Firms in heavy engineering and transport equipment industries posted productivity gains of over 10% per annum, while that of CPSEs in light engineering industry and steel posted productivity gains of 12% and 8% per annum, respectively.

    A comparison of performance of leading private and public sector enterprises show strikingly similar results. Larsen Turbo in the private sector and BHEL in the public sector showed productivity gains of around 22% per annum during the period 2001-06. Similarly, productivity gains of 16.71% per annum for Tata Motors, 20% for Maruti Suzuki is comparable with productivity gains of CPSE, BEML (TFPG 20%) in the transport equipment syndicate.

    The TFPG of 11% per annum achieved by Jet Airways is a healthy though not a stellar performance which can be replicated easily by the CPSE if it rationalises its manpower, acquires new aircraft, manages its

    vol xliv no 32

    Air India’s PSE Status Vital

    Air India also needs to remove transfer payments such as taxes and duties paid by the CPSE to government from the grants/ aid it is seeking to estimate the net financial support it is hoping to receive from the government. A strong CPSE as well as the presence of growing low cost service air carriers is necessary to overcome competition concerns post-merger of Kingfisher with Air Deccan (May 2007) and Jet Airways with Sahara (April 2007).

    The exercise carried out by ASCI shows a high concentration index post-merger, causing competition concerns. The tendency to exhibit price parallelisms in peak time slots in key origin-destination combinations only confirms that these concerns may be real soon.

    Notes

    1 Public Enterprises Survey, 2007-08, Vol II, p 411, Department of Public Enterprises.

    2 Wilima Wadhwa and R Venkatsan’s work on TFGP computations Chapter 2 “e-Readiness and Total Factor Productivity Growth of Central PSEs in the Manufacturing Sector”, 2009, National Manufacturing Competitiveness Council, Government of India.

    3 Administrative Staff College of India, 2009, “Study on Competition Issues in the Domestic Segment of the Air Transport Sector in India”, Hyderabad.

    4 R Venkatesan et al, “Study on the Revamping of the MoU System”, 2004 (New Delhi: NCAER). R Venkatesan 2008, “Memorandum of Understanding and Business Performance Appraisal of the Public Sector”, Economic Political Weekly, Vol XLIII, No 39.

    5 NCAER, 2004, “Domestic Civil Aviation in India: A Preview for a Dynamic Sector”, Ministry of Civil Aviation, New Delhi.

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