Invest in Credit Risk Mutual Fund or not?

JRD Tata had termed the process of nationalisation of Air India as a betrayal as they were not taken into confidence before the move. As news reports emerge of Air India’s privatization, it is important to discuss the significance of the move and what it means for India’s civil aviation sector over the coming decades.

But before I go into the details, let me state that unlike many of friends & colleagues, my experience with Air India has been truly exceptional so far. I would also like to express my heartfelt gratitude to the staff of Air India, especially their pilots who have operated in some of the most difficult circumstances as an act of national service. This includes several rescue operations over the years. It is fitting that an airline known for serving during times of distress is given to the Tata Group, a group which is regarded as key contributors to the process of nation building over the decades.

Burden off taxpayers

The biggest relief that privatisation of Air India will bring would be to the Indian taxpayer who pays close to Rs 7,000 crores or so towards keeping the airlines operational. Therefore, this money will eventually be saved and used for providing other public goods and services. However, it is instructive at this moment to ask why does Air India makes such losses in the first place? The answer to this lies in the inefficiency with which the airlines is operated. This inefficiency is in the form of sub-optimal use of human resources and capital deployment.

For instance, several airlines are able to operate with less labour costs per flight as they can optimize on the human resource requirements for operations. But this happens when we have a profit-oriented management – which is clearly lacking when an enterprise is with the public sector. As has been noted in the past, and even mentioned repeatedly in several prior articles, India’s own experience of privatization has shown how such entities have performed better when the management was transferred to a private sector. Air India will undoubtedly be no different.

Revenue increase

But bringing down operational costs is one thing; the other important variable is to augment revenues. One of the reasons why Air India is unable to generate greater revenues from its higher end services is because of the inadequate quality of services when compared to other similar airlines. Consequently, people may prefer other airlines at a marginally higher price than traveling with Air India. For instance, many of my colleagues do not even consider flying Air India as they feel the service is not as good as some of the other carriers. This is where the private management will be crucial as they will focus extensively on maximizing revenues, which would automatically require them to focus on improving efficiency.

The two sides are actually linked, as reducing costs will also require the new owner to put in fresh capital towards fixing instruments, improving software and in-flight entertainment etc which will also help in improving the overall in-flight entertainment experience.

It is important to understand that from a consumer’s perspective, there are two segments – first who travel primarily because of an urgency or compulsion. For them, Air India serves as a good choice if the quality of service is good. The other segment is the section which views travel as a leisure activity, where travelling via air is more about the experience rather than a means to get to a destination. It is for them that value added services become important, more so given the aspirational nature of India’s emerging middle-class.

JRD legacy

The fact that Air India has had a rich legacy of quality service under JRD Tata is illustrative of the kind of service that may be offered if the airlines is brought under the Tata Group. If anyone wants a recent example, then we have Vistara which does offer a top-notch service and flying experience. With Air India having key slots across major flying routes, the airlines could truly emerge as a global leader with the right promoter.

Tata could be a natural fit for the airlines, however, even if any other promoter takes over, we can expect the quality of the service to improve substantially. This would include better in-flight services such as in-flight entertainment, better choice of in-flight meals and several additional value-added services such as in-flight internet. It is therefore evident that both the Indian taxpayers and the consumers will benefit from privatization of Air India, just as it is evident that whoever takes over the airlines can do wonders with them.