GOOD INTENTIONS, BAD ECONOMICS

Abhijit Iyer-Mitra

18 August 2015

http://www.dailypioneer.com/columnists/oped/good-intentions-bad-economics.html

The transfer of cash-strapped Air India’s assets — two Boeing 777-300ER airplanes — to the Indian Air Force for VVIP travel, demonstrates the Government’s fiscal shoddiness, lack of serious cost-cutting measures, and a chronic inability to ideate out-of-the-box solutions

Bad decisions can seldom be justified by good intentions, and the Union Government’s recent aviation procurement decision is yet another more example of such a case. One can justifiably ask: What exactly is Right-wing about this Government? Recently, the Government announced that it will transfer two Boeing 777-300ER aircraft from Air India to the Air Force to be operated as the next VVIP aircraft for the President and the Prime Minister. The ideas surrounding this transfer were well-intentioned.

Every state or foreign visit requires two Air India Boeing 74-400s, which then have to be withdrawn from the normal scheduled routes. One is used to fly the VVIP and the second is used as back-up. The back-up is not to be dismissed — for example, during the Prime Minister’s Europe visit, his aircraft developed technical snags and the back-up had to be flown to bring him back home.

The problem is that these withdrawals for VVIP use also lead to considerable disruption of Air India’s schedule, and cause considerable inconvenience to the passengers, worsening its already notorious reputation for delays and general unreliability. Hence, it has been decided that the new 777s will be transferred entirely to the Air Force, ending future disruptions to Air India. Equally important is the economics of this decision: Since these planes have already been paid for, the additional cost incurred to prepare them for VVIP use will be minimal — simply re-painting and installing VVIP security measures. This makes more sense than buying two new airframes for about $640 million.

Sadly, far from demonstrating fiscal responsibility, these decisions actually demonstrate the appalling fiscal shoddiness and lack of serious cost-cutting measures by the Government, and its chronic ability to either adapt best practices from abroad or ideate out-of-the-box solutions. For starters, the 777-300ER aircraft is highly sought after in the international market, being something of a cash cow. Unlike the niche 777-200LR, which Air India sold for one-fifth of its price, the 777-300ERs has an exceptionally high re-sale value and also offers competitive operating costs on long haul routes that very few planes can match.

Air India bought both these planes to open up new direct routes to the United States — something that the airline then spectacularly failed to do. This was despite the fact that the India-US route is so lucrative that European and Gulf carriers profit immensely just by ferrying transit traffic. In fact, for most European and Gulf carriers, India has now become the second largest market, after the US — and much of the business comes from transit traffic. Every airline (except Lufthansa) is milking the Indian market. And what planes do they their operate on this long-haul India-US route? The 777-300ER and 777-200LR.

Surprisingly, it was not just Air India but also Jet Airways — the other Indian wide-body operator — that had to dump its excess capacity 777-300ERs. This despite both airlines configuring them in nine-abreast seating, instead of the revenue-optimised 10-abreast. The inescapable conclusion is this: There is nothing wrong with the plane but something chronically wrong with Indian aviation policy.

In the midst of a raging debate on one-rank-one-pension, wherein the Government has been pleading its inability to sanction funds for veterans, it has, however, stuck to the UPA’s ruinous Rs30,000 crore bailout package for Air India. Since the Modi regime took office in 2014, somewhere between Rs6,000 crore to Rs9,000 crore have been approved of the overall bailout plan — and this is for an airline whose own roadmap does not see it returning to profitability before 2021.

Now, instead of de-fraying the cost to the taxpayer by auctioning off the 777-300ERs, which would have fetched a premium in the market, the Government has chosen to take the two newest (and hence, most fuel-efficient and of highest-value in the second-hand market) airplanes for itself. While one can still make a strong case that given the abysmal price the 777-200LR fetches, it makes more sense to just transfer that one to the Air Force, the same cannot be said for the 777-300ER. Clearly, what is lacking here is an analysis of opportunity cost.

To get a sense of the size of one 777-300ER aircraft, factor this: Emirates configures one such plane for close to 425 passengers. This raises the next question: Why does the Prime Minister need such a big airplane especially since the deadweight Press junkets have been dropped and that too in the era of supposed ‘Minimum Government’? The blanket answer seems to be ‘security’. This does not cut much ice. The French Prime Minister flies in a Falcon 2000 small business jet while Prime Minister David Cameron of the UK has chosen to fly commercial. The Australians, for whom every flight is a long haul, operate the small 737-700 business jet. Surprisingly, the Indian Air Force bought similar 737-700s to transport the Prime Minister and the President — but within India. 

Equally surprising, operational secrecy with regard to VVIP travel is non-existent. India does not have access to any of the planes’ sophisticated military electronics — presumably the same defensive systems that are to be fitted to the 777-300ER. Also, we are equally unable to learn from the mistakes of others. A few year after the Chinese ordered a Boeing 767 for their President, they discovered that 27 bugs had been eavesdropping and transmitting important command decisions from within the aircraft. For India, which refuses to sign a communications inter-operability agreement with the US military, the potential compromise of its leadership’s most intimate decisions seems to be quite acceptable.

All of this does not even take into account how much the Air Force will have to spend on keeping up these airframes. Apart from the operational cost, there is the cost of maintaining spares, employing and training pilots etc. In effect, Air India’s losses are in part being transferred to the Air Force.

This is a Government chasing its own tail. It refuses to fix aviation policy and enable local business to bloom. It refuses to fix Air India or privatise it, and instead spends many thousands of crores of rupees to keep it afloat. And finally, it procures Air India’s most valuable assets, in an extraordinarily untenable cost calculation, that will burden the Air Force with deadweight for years to come.

With this kind of costing, is it any surprise that the Rafale negotiations are yet to be completed? The Ministry of External Affairs’ promise of ‘significant discounts’ in that deal has been completely disproven. The question is how much more laxity is it willing to tolerate in cost calculations and policy?

(The writer is Programme Coordinator, National Security Programme, at the Observer Research Foundation, Delhi)