Indian Skies | A Foul Smell is Evident

NEW DELHI: The surest way to become a millionaire, said Richard Branson, is to begin as a billionaire and start an airline. That should remain a joke. The Tata Group, however, is reportedly inching towards the acquisition of troubled Jet Airways.

Jet operates in a challenging market where a protracted fare war has driven ticket prices below viability, in the background of high and volatile fuel prices, made more expensive by local levies.

DGCA data shows that the domestic aviation market registered a growth of about 21% between January and September this year. Nevertheless, all listed airlines made losses during the second quarter of this fiscal.

There are allegations of one airline misusing its dominant position by launching flights flanking those of the competition, thus lowering yields. So, it is welcome move for Indian airline industry that the Competition Commission of India (CCI) has now launched an investigation into the pricing of airline tickets.

It should look into the situation in which every airline makes a loss but fares refuse to go up. Of course, passengers will not complain when airfares drop to levels that are not sustainable, but the practice hurts the smaller operators, in particular, and those that are financially too weak to sustain losses.

As competition gets fierce, companies could well collude with existing competitors to keep out new entrants or to indulge in predatory pricing. CCI’s job is to prevent such practices. Predatory pricing will hurt consumers (read: passengers) in the long run if those that emerge from the shakeout then act as a cartel.

Cash-strapped Jet has been in talks with strategic and financial investors to sell assets and a major chunk of its business to stay afloat.

One potential deal structure could include Tata taking over Jet assets that include planes, leases, pilots and slots but not the company. Ideally, Jet should be sold as a company.

Shareholders would also get some money. However, that will not be the case if lenders are forced to move the bankruptcy court to recover their dues. The proceeds of selling off a company under resolution of a bad loan go to its creditors.

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