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Why bailing out private airlines by the government isn't a good idea

Friday, 1 August 2014 - 5:24pm IST | Place: Mumbai | Agency: DNA Webdesk

If one has to be find sectors in the economy that are in serious trouble, the aviation sector might be right at the top. The combined accumulated losses of the airlines sector stands at Rs 49,000 crore, and now the government is reportedly planning for a bail out package for the sector including private carriers like Spicejet, Jet Airways.

Financial Express reports that the government might be drawing up a plan that will offer working capital loans to the companies at a lower rate of 7-8%. The government might allow the companies to get more funds from abroad, and even allow easier policies for FDI.
But the real question remains so why are the airlines making losses? The common answer would be high taxes of aviation fuel, high airport taxes, expensive loans and very heavy debt burden on their balance sheets.
It is true that if the government offers loan at lower costs, it will come as some relief for the companies and bring down their interest costs.
But any one time relief packages over the airport or ATF taxes will not make much of a difference for two reasons.
One, the government might not be actually ready to bring down the taxes substantially which means offering sops would be like just recycling of the same money.
Two, other than relief on the interest cost, any sop cannot offer any long term solution to the woes of the airlines. The airlines have to tweak their own business models to increase capacity utilisation, passenger traffic and even usage of each aircraft.
In fact, one must not forget that the private airlines like GoIndigo and GoAir are running themselves profitable under the same system. One is not debating on the tax structure of the government, a discussion that must include the fact that there are airline companies making profit in the same system. But the point is without tweaking it, taking temporary measures will not solve anything.

The government has in fact made matters worse by allowing licences to six more airlines all of which will be competing against each other brutally brining down prices. Though this would mean good news for flyers, the airlines might be bleeding even more if they cannot convert the discounts into increased traffic. Jet Airways even yesterday announced a 50% discount of flights for travelling from September onwards.
If the government offers sops to some airline because they cannot run a profitable business, it would be going against the spirit of "private enterprise" and even going against those who are running the business profitable.
And finally, the money the government offers essentially belongs to the citizens of the country. Why would one use the tax payers' money to bail out private companies, in whose profits or losses, the citizen has no share?




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