The Jet Airways bailout plan, which will end up making the airline an effective subsidiary of public sector banks after they convert a part of their loans into equity at the nominal cost of 1, is no rescue plan at all. Rather, it will compound the airline sector’s woes, as we will now have two publicly owned, loss-making airlines—Air India Ltd and Jet Airways (India) Ltd—on the taxpayer’s books. The intention is not to nationalize the latter, and the stated intention is to privatize Air India, too, but this is the scenario right now. This kind of no-hoper package is being proposed because Jet Airways is sinking at a politically inconvenient time, when elections are around the corner.

The logical response to Jet Airways’s financial distress is sale to a stronger promoter or a reference to the insolvency courts, not more bank accommodation. In fact, the temporary bank takeover of Jet Airways will make the industry’s finances worse in the short run, as the last thing it needs is two state-supported sinking airlines trying to grow market share at the expense of the rest. The industry needs consolidation and competition, not life support at one end, and a growing monopoly at the other.

The aviation industry has been haemorrhaging all over, with the advantage flowing only in one direction: a huge monopoly in favour of the strongest player, IndiGo (InterGlobe Aviation Ltd).

While IndiGo is facing its own problems of pilot shortage and trouble with its Airbus A320neo engines, in terms of market share growth, it is a near-monopoly. In December 2018, IndiGo’s market share was over 43%, with three runners-up who had suboptimal market shares of around 12% each (Air India, Jet Airways and SpiceJet Ltd). The No.5 spot went to GoAir at just under 9%.

Put simply, the rest of the aviation industry is collectively barely bigger than the biggest. We are already in a lopsided monopoly situation, and this will worsen as we try to keep both Air India and Jet Airways afloat with huge life support. Both airlines will have to maintain a minimum market share in order to retain cash flows, and this will bleed everyone further. You only need one big push from rising oil prices to make both Air India and Jet Airways complete basket cases. The government may be hoping that nothing bad will happen till May, but Air India and Jet Airways will be the first two flies to land in the soup of the general election winner.

While there is no wishing away the reality of a political economy, even a government in election mode needs to do enough of the right things so that privatization can happen quickly after the elections. The simplest thing to do would be to remove the 49% shareholding limit for foreign airlines in domestic aviation, and Jet Airways could be re-privatized quickly. Air India could follow later. The second possibility is sale of Naresh Goyal’s equity to a new promoter (Etihad Airways PJSC, etc.) at a drastically reduced value, and banks taking a sharp haircut to entice the new promoter.

But if this is not going to be done in the belief that domestic majority ownership is vital (for some unfathomable reason), the least bad idea may be to merge the two airlines preparatory to privatization.

Anyone suggesting the merger of two loss-makers ought to have his head examined, but given the political context in which this is happening, and given also that any failure at Jet Airways means banks will have another Kingfisher-like mess on their hands, merger is an option, provided the end-game is government exit from ownership.

The main benefit of such a merger is that Air India would get listed through a reverse merger with Jet Airways. We would now have a market valuation for the combined entity, allowing the government to offload its stakes at some future date.

Second, a merger would allow both airlines to share infrastructure and costs, and post a combined market share that would be at least a quarter of the total. This will not only slow down IndiGo’s march towards monopoly, but also prompt further consolidation among the remaining players, making Indian aviation a race with three potentially strong players.

In an industry marked by low margins, where the only competitive advantage is low cost on every front—fuel, aircraft usage, overheads, etc.—scale is vital to survival.

Large airlines will also be able to obtain better bargains from aircraft lessors and manufacturers, and allow them to buy or lease more fuel-efficient aircraft more frequently to keep the mix of owned and leased aircraft at the optimum.

Third, any consolidation will bring pricing power back to the industry. The only thing to watch out for is cartelization, for which the Competition Commission of India (CCI) needs to keep a wary eye.

The Rule of Three, an idea postulated by management gurus Jagdish Sheth and Rajendra Sisodia, suggests that in competitive markets, the top three volume-driven players, generalists who serve all segments of the market, will have 70-90% shares, with the rest reduced to niche or specialist players. Indian aviation has already reached the stage where the Rule of Three looks the most likely outcome in the medium term. The five main airlines have nearly 90% market share, and one or two may need to drop out or merge to make the industry viable in the medium term.

R. Jagannathan is editorial director, Swarajya magazine.

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