India’s oldest private airline, Jet Airways, has been grounded, after having been in operation for close to 26 years. This happened after the airline’s request for more money from banks to which it already owes more than Rs 8,000 crore, was turned down. After this refusal, the airline ran out of funds to continue operations and had to shut down.
Let’s take a look at the issue pointwise.
1) The problem is that no one is going to buy the beleaguered airline in a hurry. Jet’s most valuable assets are its slots that it has at airports around the world and bilateral rights. These are going to remain for 90 days. Beyond that they will go and it won’t make sense for anyone to buy the airline.
2) Four potential investors, Etihad Airways, government-owned National Infrastructure and Investment Fund and private equity firms Indigo Partners and TPG, have expressed an interest to buy the airline. The trouble is, an expression of interest doesn’t mean much. The potential investors will need time to go over the books of Jet Airways and time is something that the grounded airline does not really have.
3) The creditors in this case decided not to go through the Insolvency and Bankruptcy Code (IBC) route to recover their dues. The logic for not taking that route was that IBC is a time-taking process and would have ended up hurting the valuation of the airline, and in turn the total amount of money they would have been able to recover. As things have turned out, not going the IBC route hasn’t made a much of a difference.
4) The operational creditors of the airline, everyone from its service providers to its workers, can still take the airline to the bankruptcy court. Whether that happens remains to be seen.
5) More importantly, calls are being made for the government to rescue the airline. “How is it good as a country to reduce so much seat capacity," an analyst, told Mint. News reporters who have been on the aviation beat have also made a case for 20,000 jobs at Jet Airways being saved. And so have concerned citizens who have expressed worry at the fact that with Jet Airways being grounded, airfares will go up or for that matter have already gone up quite a lot.
The entire Jet Airways story again brings out the point that India's rich and upper middle class wants socialism as soon as things start to hurt them. Economists and analysts, who make a living out of advocating free markets on other days, now want the airline to be rescued. There are multiple reasons why the government should not rescue Jet Airways, the foremost being that it’s not the business of the government to run businesses in which it has no expertise. (Not that this has stopped the government from doing that).
6) The irony is that the taxpayer-funded National Infrastructure and Investment Fund is one of the potential buyers of the airline. This is beyond bizarre. The physical infrastructure in India needs a lot of money and the last thing an infrastructure fund funded by the taxpayer should be doing is buying a failing airline. It should be investing money for building better roads, railway stations, ports and so on.
7) But what about airline fares going up? This is a question that is worrying everyone. The trouble is, that’s how the market operates. With Jet Airways grounding operations, the supply of airline seats has gone down. Given this, prices of other airlines are bound to go up in order to ensure that supply matches demand, and only those who really have to travel, get around to travelling. The rest can make do with travelling by road, if it’s a short distance (say Delhi to Chandigarh) or simply make video calls to carry out professional meetings.
8) Also, it is worth remembering here that Jet Airways' competitors are not going to sit around doing nothing and not cash in on the opportunity of expanding their market. In fact, I am travelling from Mumbai to Hyderabad and back over the weekend on an Air Vistara flight. The airline did not fly this sector earlier. This expansion will also benefit the employees of Jet Airways, as airlines will need newer employees to fuel their expansion plans.
Of course, other airlines will take some time to capture the space vacated by Jet Airways and there will be some short-term pain that cannot be avoided. But that’s no good excuse for the government to take over the airline.
On the positive side, the competitors will enjoy a higher profit which will help them expand quickly. It is worth remembering here that airlines lease a lot of planes. They don’t own them. In this scenario, all that is required for an airplane to change airline is some painting on the outside and some refurbishing on the inside. In fact, the planes that Jet Airways had leased could easily move to other airlines. The government should be facilitating this by not getting too bureaucratic.
9) It is worth remembering here that the government already has Air India to do deal with, an airline that has losses of more than Rs 40,000 crore. Further, if 20,000 jobs at Jet Airways are important, then so are the 1.76 lakh jobs at BSNL. The question is where does this end?
10) In the end, it shouldn’t matter to the country whether Jet Airways flies or not. What matters is a robust aviation sector with or without Jet Airways. What matters is whether people can fly from one place to another at a price which is reasonable. Hence, the government should be working towards making it easier for companies to fail. Creative destruction is an essential part of a robust economy. An excellent example here is that of restaurants. They keep opening and shutting down, but even with that people have access to excellent food all the time.
(The writer is an economist and the author of the Easy Money trilogy)
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Updated Date: Apr 18, 2019 13:54:53 IST