Journal of Case Research vol: 1 issue: i Federation of Indian Airlines: The Strike That Was Not S.S. Ganesh1 “We have been appealing to the government for a long time but have received no response, even when most other sectors have received assistance. Our losses are no longer sustainable” – Vijay Mallya, Chairman of FIA “Would the private airlines allow the government control in their organizations in case of a bailout as happened in other countries?” – One Senior Official from Ministry of Civil Aviation “Huge sums of money on cricket teams, buying more planes than needed, buying other airlines. Is the public to pay for bad management practices?” – D Raja, CPI Leader ******* Federation of Indian Airlines (FIA) gave an ultimatum to the Government of India to bail out the airlines lest they may stop their operations on 18th August 2009 as a token strike. This decision was communicated to the Government by the private airlines after a long meeting of the members of Federation of Indian Airlines except Air India and Paramount Airlines. After the meeting, the members of FIA said that they would request other airlines including Air India, although Air India being the public sector airline and not party to the decision, to join the strike as it was natural for all airlines which suffer huge losses to seek Government support. Speaking to the media on the Government support to airlines, Chairman of the Federation of Indian Airlines and Chairman of Kingfisher Airlines, Vijay Mallya said “We have been appealing to the government for a long time but have received no response, even when most other sectors have received assistance. Our losses are no longer sustainable.1” Further, it was reportedly said that Kingfisher Airlines Chairman Vijay Mallya had even threatened to suspend flights "indefinitely" and close down Kingfisher Airlines if the demands of the aviation industry were not met by the government during the meeting held by FIA. However, Vijay Mallya, Chairman of Kingfisher Airlines, and Naresh Goyal, Chairman 1 Associate Professor, OB/HR Area, Xavier Institute of Management, Bhubaneswar, India – 751013 Email: [email protected] 64 Journal of Case Research vol: 1 issue: i of Jet Airways, had said the suspension on August 18 was not a strike or ultimatum to the government. Federation of Indian Airlines – An Introduction Federation of Indian Airlines, as an apex body of airline industry comprising members in the full service and low-cost-carriers, took place during October 2006. The members of FIA are Kingfisher Airlines, Jet Airways, Air India, Go Air, Indigo, JetLite, Kingfisher Red, Paramount Airways and SpiceJet. It acts as the voice of airline industry in India by providing platform to member airlines for consensus building in order to identify the core issues of the industry and to advocate its interests with regulatory bodies, government departments and other key stakeholders. The chief of all member airlines form the executive council of FIA which guides the affairs of the association through a full time permanent secretariat to carry out the varied activities of the association which will facilitate the growth in Indian aviation industry. Key Issues Facing Indian Aviation Industry According to FIA, the private airlines had incurred the cumulative losses of Rupees 10,000 crores (around $2 billion) in the year 2008-2009 (See Exhibit 01). The Indian carriers cumulative loss of $2billion dollar accounts for about 22% of the losses of global airlines which was estimated to be $9 billion by the IATA for the year 2008-20092. The $2 billion dollar cumulative losses of Indian carriers is also a magical sum considering the fact that passengers traffic in India during 2008-09 was estimated to be 122 million compared to 2341 million the world passenger traffic project by ACEXE3. One of the key issues affecting airline industry in India is excessive price of Air Turbine Fuel (ATF) which caused the cumulative losses for domestic airlines since ATF accounts for nearly 40% of the operating costs of airlines. A position paper by FIA indicated that ATF price in India for domestic airlines shot up as high as 60% to 91% during the period between 2004 and 2007 compared to international ATF prices (See Exhibit 02) and the price of ATF for international flights in India was as high as 73% at during April 2007 compared to international price. In the position paper, FIA estimated that reduction in ATF price by 65% would result in higher operating profits to the extent of 25% and the annual saving for the 2 “Global Airline Losses to Hit $9 Billion in 2009,” Businessworld, 8th June, 2009. 3 “Air Traffic Trends: World Vs India,” Aviation Centre for Excellence (ACEXE), 2009. 65 Journal of Case Research vol: 1 issue: i aviation industry would be $ 624 million if the government could rationalize the ATF price in India for domestic operations in line with the international prices. According to FIA, the reasons for high ATF price in India are high customs duty (effective duty of approximately 20%), high excise duty at 8.24% and the absence of uniform sales tax on Air Turbine Fuel (ATF) across several states in India hover around 33% which not only adversely affect the financial health of the airlines and making airlines in India uncompetitive but also unattractive for equity capital and debt financing. For instance, during 2007, while Andhra Pradesh was charging the highest sales tax on ATF at 33%, majority of the states were charging sales tax on ATF ranging from 20% to 30% with few exceptions like Andaman and Mizoram having 0% sales tax on ATF. FIA has been demanding a uniform sales tax rate of 4% across the country by notifying ATF under declared good category. The Ministry of Civil Aviation could not address the demand of uniform sales tax rate on ATF by FIA as it was under the purview of state governments. FIA recommended that the government should rationalize the tax structure; regulate the ATF base price, pricing mechanism, and competition; and also improve the ATF distribution infrastructure in order to improve the financial health of airline industry. Besides the ATF tax issue, FIA had also voiced its concern regarding parking and airport usage charges in India and the new ground handling policy by the Government. FIA has reason to be apprehensive about the parking and airport charges which, according to FIA, are as high as 60% compared to the international airports and airlines industry has been losing money to the tune of $250 million every year. Further, the proposed new ground handling policy for the Metropolitan and Greenfield Airports made the airlines to view the proposal as the last nail in the coffin of loss making Indian carriers as it would escalate the cost of the carriers by 30% to 40%. Assistance or Bailout? Private airlines’ demand for a bailout citing the examples of such moves in other countries during the global meltdown did not find any favour with the Ministry of Civil Aviation. For instance, one of the senior officials of Ministry of Civil Aviation argued “would the private airlines allow the government control in their organizations in case of a bailout as happened in other countries?4” 4 BS Reporters, “Pvt airlines to halt flights on Aug 18,” Business Standard, 1st August, 2009. 66 Journal of Case Research vol: 1 issue: i While Jet Airways and Kingfisher Airlines incurred losses Quarter on Quarter basis, no-frills airlines like SpiceJet and Indigo5 made significant profit during the first quarter of the fiscal year 2009 (See Exhibit 03). Ajay Singh, the director of SpiceJet, denied media’s claim on private airlines seeking bail out by declaring that “What we want is to get inputs and the various services for which we pay at international levels. These include aviation turbine fuel (ATF), ground-handling charges and landing and parking charges. We are not asking for a bailout at all.6” The New Ground-Handling Policy Ground-handling refers to all the work at airport premises relating to passengers, cargo and aircraft, except the engineering functions and catering, such as passenger check-in, baggage handling, boarding and disembarking passengers i.e. attaching the aero-bridge or ladder, aircraft cleaning, aircraft handling, fuelling, cargo handling etc. At present, many airlines carry out the ground-handling work for their airlines on their own, while some airlines have either outsourced it to Air India or private companies like Cambata Aviation. The new ground handling policy was approved by the Government in February, 2007, which prevented the private airlines from undertaking the ground handling by self or through third parties in all the Metropolitan Greenfield Airports from 1st January 2009. The policy envisaged that ground handing in these airports with effect from the above date would be solely carried out by the airport operator Airports Authority of India (AAI) or its joint venture like Delhi International Airport Limited (DIAL) which is a joint venture consortium of GMR group, AAI and Fraport Eraman Malaysia. The subsidiary companies of national carriers such as Air India or their joint ventures specialized in ground handing will be allowed to carry out ground handling on the basis of revenue sharing with the airport operator like AAI or DIAL. The new ground handling policy also permits the airport operators to choose any other ground handling service through competitive bidding on revenue sharing basis provided the ground handling agencies obtain security clearance from the government. The policy allows only domestic airlines to handle the ground services at the other airports i.e., non-metro 5 Being a unlisted company Indigo need not divulge its financial results to public.