Private Airlines In India -
A Case Of Market Failure
By Girish Menon
02 August, 2009
Countercurrents.org
Yesterday, under the leadership of showman Vijay Mallya, the Federation of Indian Airlines (FIA) ratcheted up the pressure on the Indian government to help their members to avoid the consequence of unpaid bills and loans. They threatened a day's strike on 18 August and promised more of the same to come; in an attempt to browbeat the Indian government. If the FIA wins, it will be one more instance of 'privatisation of profits and socialization of costs'.
On the CNN-IBN news programme at six pm last evening, an expert mentioned that most of these private airlines were offering flight tickets at $60 when the actual cost to the airline was $ 100. These lower fares may have been a part of the price penetration strategy that is commonly taught at business schools. The beneficiaries of such a strategy are the new entrant airlines and the passengers that availed of this freebie. The moot question therefore is why should the majority of Indians bail out this minority group when none of them have obtained any benefits of the largesse of the loss making airlines. These airlines hope that their customers who enjoy undue political and economic power will force the government to support their demand for a subsidy.
In a free market, a firm that makes losses will quit the market thereby lowering supply and will raise prices resulting in better bottom lines for the survivors. Why is this basic principle of the market being ignored by Mallya and co? It is because in India the FIA believes they can bully the pliant government to support their profligate ways. Praful Patel, the civil aviation minister, himself has not been a neutral arbiter in the civil aviation industry, acceding to arbitrary rules that supported incumbent airlines.
I think the private airlines should not be offered any handout other than what they have obtained so far. If they go bust, so be it and India may have a better civil aviation industry.
About the author:
I used to work in the aviation industry between 1987 - 2000. Now I am a teacher of economics at a college in Cambridge, UK. I have a blog.
http://giffenman-miscellania.blogspot.com/
