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Federation of Indian Airlines: The Strike That Was Not

Federation of Indian Airlines: The Strike That Was Not S.S. Ganesh 1 We have been appealing to the government for a long time but have received no response, even when most other sectors have received assistance.
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Federation of Indian Airlines: The Strike That Was Not S.S. Ganesh 1 We have been appealing to the government for a long time but have received no response, even when most other sectors have received assistance. Our losses are no longer sustainable Vijay Mallya, Chairman of FIA Would the private airlines allow the government control in their organizations in case of a bailout as happened in other countries? One Senior Official from Ministry of Civil Aviation Huge sums of money on cricket teams, buying more planes than needed, buying other airlines. Is the public to pay for bad management practices? D Raja, CPI Leader ******* Federation of Indian Airlines (FIA) gave an ultimatum to the Government of India to bail out the airlines lest they may stop their operations on 18 th August 2009 as a token strike. This decision was communicated to the Government by the private airlines after a long meeting of the members of Federation of Indian Airlines except Air India and Paramount Airlines. After the meeting, the members of FIA said that they would request other airlines including Air India, although Air India being the public sector airline and not party to the decision, to join the strike as it was natural for all airlines which suffer huge losses to seek Government support. Speaking to the media on the Government support to airlines, Chairman of the Federation of Indian Airlines and Chairman of Kingfisher Airlines, Vijay Mallya said We have been appealing to the government for a long time but have received no response, even when most other sectors have received assistance. Our losses are no longer sustainable. 1 Further, it was reportedly said that Kingfisher Airlines Chairman Vijay Mallya had even threatened to suspend flights indefinitely and close down Kingfisher Airlines if the demands of the aviation industry were not met by the government during the meeting held by FIA. However, Vijay Mallya, Chairman of Kingfisher Airlines, and Naresh Goyal, Chairman 1 Associate Professor, OB/HR Area, Xavier Institute of Management, Bhubaneswar, India of Jet Airways, had said the suspension on August 18 was not a strike or ultimatum to the government. Federation of Indian Airlines An Introduction Federation of Indian Airlines, as an apex body of airline industry comprising members in the full service and low-cost-carriers, took place during October The members of FIA are Kingfisher Airlines, Jet Airways, Air India, Go Air, Indigo, JetLite, Kingfisher Red, Paramount Airways and SpiceJet. It acts as the voice of airline industry in India by providing platform to member airlines for consensus building in order to identify the core issues of the industry and to advocate its interests with regulatory bodies, government departments and other key stakeholders. The chief of all member airlines form the executive council of FIA which guides the affairs of the association through a full time permanent secretariat to carry out the varied activities of the association which will facilitate the growth in Indian aviation industry. Key Issues Facing Indian Aviation Industry According to FIA, the private airlines had incurred the cumulative losses of Rupees 10,000 crores (around $2 billion) in the year (See Exhibit 01). The Indian carriers cumulative loss of $2billion dollar accounts for about 22% of the losses of global airlines which was estimated to be $9 billion by the IATA for the year The $2 billion dollar cumulative losses of Indian carriers is also a magical sum considering the fact that passengers traffic in India during was estimated to be 122 million compared to 2341 million the world passenger traffic project by ACEXE 3. One of the key issues affecting airline industry in India is excessive price of Air Turbine Fuel (ATF) which caused the cumulative losses for domestic airlines since ATF accounts for nearly 40% of the operating costs of airlines. A position paper by FIA indicated that ATF price in India for domestic airlines shot up as high as 60% to 91% during the period between 2004 and 2007 compared to international ATF prices (See Exhibit 02) and the price of ATF for international flights in India was as high as 73% at during April 2007 compared to international price. In the position paper, FIA estimated that reduction in ATF price by 65% would result in higher operating profits to the extent of 25% and the annual saving for the 2 Global Airline Losses to Hit $9 Billion in 2009, Businessworld, 8 th June, Air Traffic Trends: World Vs India, Aviation Centre for Excellence (ACEXE), aviation industry would be $ 624 million if the government could rationalize the ATF price in India for domestic operations in line with the international prices. According to FIA, the reasons for high ATF price in India are high customs duty (effective duty of approximately 20%), high excise duty at 8.24% and the absence of uniform sales tax on Air Turbine Fuel (ATF) across several states in India hover around 33% which not only adversely affect the financial health of the airlines and making airlines in India uncompetitive but also unattractive for equity capital and debt financing. For instance, during 2007, while Andhra Pradesh was charging the highest sales tax on ATF at 33%, majority of the states were charging sales tax on ATF ranging from 20% to 30% with few exceptions like Andaman and Mizoram having 0% sales tax on ATF. FIA has been demanding a uniform sales tax rate of 4% across the country by notifying ATF under declared good category. The Ministry of Civil Aviation could not address the demand of uniform sales tax rate on ATF by FIA as it was under the purview of state governments. FIA recommended that the government should rationalize the tax structure; regulate the ATF base price, pricing mechanism, and competition; and also improve the ATF distribution infrastructure in order to improve the financial health of airline industry. Besides the ATF tax issue, FIA had also voiced its concern regarding parking and airport usage charges in India and the new ground handling policy by the Government. FIA has reason to be apprehensive about the parking and airport charges which, according to FIA, are as high as 60% compared to the international airports and airlines industry has been losing money to the tune of $250 million every year. Further, the proposed new ground handling policy for the Metropolitan and Greenfield Airports made the airlines to view the proposal as the last nail in the coffin of loss making Indian carriers as it would escalate the cost of the carriers by 30% to 40%. Assistance or Bailout? Private airlines demand for a bailout citing the examples of such moves in other countries during the global meltdown did not find any favour with the Ministry of Civil Aviation. For instance, one of the senior officials of Ministry of Civil Aviation argued would the private airlines allow the government control in their organizations in case of a bailout as happened in other countries? 4 4 BS Reporters, Pvt airlines to halt flights on Aug 18, Business Standard, 1 st August, While Jet Airways and Kingfisher Airlines incurred losses Quarter on Quarter basis, no-frills airlines like SpiceJet and Indigo 5 made significant profit during the first quarter of the fiscal year 2009 (See Exhibit 03). Ajay Singh, the director of SpiceJet, denied media s claim on private airlines seeking bail out by declaring that What we want is to get inputs and the various services for which we pay at international levels. These include aviation turbine fuel (ATF), ground-handling charges and landing and parking charges. We are not asking for a bailout at all. 6 The New Ground-Handling Policy Ground-handling refers to all the work at airport premises relating to passengers, cargo and aircraft, except the engineering functions and catering, such as passenger check-in, baggage handling, boarding and disembarking passengers i.e. attaching the aero-bridge or ladder, aircraft cleaning, aircraft handling, fuelling, cargo handling etc. At present, many airlines carry out the ground-handling work for their airlines on their own, while some airlines have either outsourced it to Air India or private companies like Cambata Aviation. The new ground handling policy was approved by the Government in February, 2007, which prevented the private airlines from undertaking the ground handling by self or through third parties in all the Metropolitan Greenfield Airports from 1 st January The policy envisaged that ground handing in these airports with effect from the above date would be solely carried out by the airport operator Airports Authority of India (AAI) or its joint venture like Delhi International Airport Limited (DIAL) which is a joint venture consortium of GMR group, AAI and Fraport Eraman Malaysia. The subsidiary companies of national carriers such as Air India or their joint ventures specialized in ground handing will be allowed to carry out ground handling on the basis of revenue sharing with the airport operator like AAI or DIAL. The new ground handling policy also permits the airport operators to choose any other ground handling service through competitive bidding on revenue sharing basis provided the ground handling agencies obtain security clearance from the government. The policy allows only domestic airlines to handle the ground services at the other airports i.e., non-metro 5 Being a unlisted company Indigo need not divulge its financial results to public. However, According to Centre for Asia Pacific Aviation, an aviation consulting firm, Indigo had made a net profit of 40 to 60 crore at the end of first quarter of the fiscal year BS Reporters, Pvt airlines to halt flights on Aug 18, Business Standard, 1 st August, airports but prevent foreign carriers from deploying their own manpower or agencies for that purpose in any Indian airport. Opposition to New Ground Handling Policy The private carriers opposed the new ground handling policy not only for financial reasons but also for including passenger or terminal services like check-in services, arrivals, lost baggage, airlines lounges and transfers among various other services in ground handling policy. The airlines viewed these services as core customer care functions which act as the product / service differentiator to gain the competitive edge over the rival airlines. For instance, the full service carriers objected the above proposal as they are offering first, business and economy class services for varying range of customer segments whereas the low cost carriers were up against the proposal as it is critical for them to use their own manpower to achieve quick turnaround time for their aircrafts. On the other hand, the employees unions of both foreign and national carriers opposed the new ground handling policy due to apprehensions over likely job losses for around employees. The concerned unions of foreign carriers represented British Airways, Gulf Air and Saudi Arabian Airlines, while the national carrier s employees formed an umbrella organization Civil Aviation Joint Action Force (CAJAF), comprising representatives from Air Corporation Employees Union and Aviation Industry Employees Guild, to fight against the new ground handling policy. The Legal Challenge for New Ground Handling Policy The foreign carriers employees union challenged the circular of Director General of Civil Aviation (DGCA) and Airports Authority of India (AAI), which prevented the foreign carriers from self ground handling, before the Bombay High Court as it would leave thousands of employees jobless. In reply, DGCA clarified its stand through an affidavit in Bombay High Court that the decision to evolve a new ground handling policy was taken by the Government after careful deliberations in order to provide ground-handling services of international standards in a competitive environment, balanced by the paramount considerations of aviation safety and security. It also argued that upkeep, development and upgradation of the airport infrastructure require financial resources, which are to be raised from airport-related services such as ground 68 handling. This ensures generation of income not only for the airport operator to maintain the infrastructure, but to ensure orderly growth and development of the airports. The airlines will have to select one of the ground-handling agencies selected through bidding by the airport operator. Competitive bidding ensures that the best-equipped ground handling agency is selected. This has been recognized all over as legitimate and efficient system of selecting the agency as the reduction in number of agencies doing ground-handling work will reduce chaos and congestion at the airports as currently, more than 50 ground handling agencies operate in India 7. Is Security a Concern? Airport Security Vs. Job Security The airport operators argued that allowing each airline to handle their ground handling separately gives raise to the security concerns at the Indian airports and the airport operators may incur huge losses in future if the charges are fixed at the current level of Rupees 8500 as the cost of providing ground handling service per aircraft may raise between Rupees and Rupees in the future. They also proposed a middle path to alleviate the concerns of airlines and their staff that they would absorb 80% of ground handling staff and buy out the airlines equipment which are three years old so that the jobs of ground handling staff are protected and airlines don t lose money on their investment made in equipments to provide ground handling services. However, the private airlines brushed aside the security concerns raised by the airport operators. They argued that the ground clearing staff members go through the regular security clearances and hence they would not pose any risk to the safety and the security of passengers or airlines. They also cited that there was no reason why India should not allow airlines to manage ground handling on their own as in US and many countries in Europe. Similarly, CAJAF did not buy the idea of absorption of 80% of ground handling staff as they feared that even if they were absorbed by the airport operators, the terms and conditions of their employment may not be the same as the operators formed joint ventures as private company which does not require government approval in important areas like selection, wages, working conditions, assessing employee redundancy etc., besides demanding higher productivity from employees. For example, the proposed joint venture between Air India 7 ET Bureau, Foreign airlines staff challenge new ground handling policy, The Economic Times, 26 th December, (NACIL) and Singapore Airport Terminal Services (SATS) was a private company with each company holding 50:50 stakes. The Confrontation CAJAF threatened an indefinite strike from 1 st January 2009 if the Government went ahead with its plan of outsourcing of ground handling services. During December 2008, the CAJAF members gathered outside Mumbai airport to protest against the new ground-handling policy when they learned about a meeting between civil aviation ministry officials, Air India executives and SATS executives. The protesters requested the SATS executives to leave the place and most of the SATS executives left the premises sensing the fury of the CAJAF members gathering, except its Chief Operating Officer (COO), Mr. Karmjit Singh. Consequently, there were some altercations between him and the protesters which led to the protestors manhandling Mr. Karamjit Singh and one of the executive directors of Air India before they were safely escorted to their vehicle by some sensible members of the CAJAF. Delay or No Delay? Mounting opposition from both the private players and the employees union, the new ground handling policy missed its first operational deadline and it was extended to July 2009 from the original 1 st January 2009 deadline. On clarifying the reason for the delay, Praful Patel, the Civil Aviation Minister, told the media that multiple issues that needed to be resolved before implementing the new policy since the delay is due to National Aviation Company of India Limited (NACIL) which had not formalized the joint venture agreement (JV) with Singapore Airlines ground-handling firm Singapore Airport Terminal Services (SATS). He also brushed aside the allegations related to major job losses to employees in groundhandling services as they would be mitigated by the new jobs that would be created. However, the Civil Aviation Ministry could not implement the new ground-handling policy in July 2009 as the Ministry once again extended the deadline to December 31, Speaking to the media, the Civil Aviation Secretary defended the postponement of new ground-handling policy as he categorically denied any delay in implementing the new ground-handling policy and he also attributed the extension of deadline to abeyance in the 8 On the Dec 30, 2009, the Civil Aviation Ministry set off the deadline for implementing the new ground handling policy for the third time without mentioning a future date. Praful Patel, the Civil Aviation Minister, said, The implementation of the new ground-handling policy would be deferred for now. We will review the policy after inter-ministerial consultations shortly. Source: Policy on Ground Handling Being Deferred Again, live mint, 30 th December, exit of the private airlines from ground-handling due to their huge investments in ground handling equipments and the hired services of around 31,000 employees to provide such ground handling services. Even as the civil aviation ministry extended the deadline of new ground handling policy, the Federation of Indian Airlines announced the token strike on 18 th August 2009 to protest against the government. Interventions from Finance Ministry and Civil Aviation Ministry On being asked by the media to comment on the strike call given by the FIA over the ATF tax issue among various other issues including the new ground-handling policy, Pranab Mukherjee, the Finance Minister, said, I will talk to the Civil Aviation Minister. The Civil Aviation Minister said that while the government understands the problems of the aviation sector which is an important sector for the overall development of the Indian economy, it cannot be a mute spectator to any inconvenience to the passengers caused by the private airlines. He also warned of appropriate actions by the DGCA to protect the interests of the public if the flight schedules of private airlines are disrupted due to the strike. While asked about bailout to private airlines, the Finance Minister categorically ruled out the possibility of government providing any financial help to loss making private carriers but announced that the ministry is open for dialogues with them to discuss and resolve any grievance which is reasonable and fair. The Opposition from the Left The government s invitation to private players to engage in peaceful dialogue without taking a confrontative stand was profoundly criticized by the Left party especially by the senior CPI Leader D. Raja. He said that it was alarming that private airlines issued a strike threat and puzzled to see the way the government has succumbed to the threat immediately and requesting them to come for talks. 9 D Raja described the bailout demand from the private airlines as unreasonable since the private airlines continue to incur losses due to their bad management practices as they spend huge money on cricket teams, buying more planes than needed, acquiring other airlines and paying high salaries to their owners and senior management personnel. He also questioned 9 CPI leader seeks enquiry into pvt airlines demand for bailout, Press Trust of India, 19th August, the logic of government funding the private airlines using the public money instead of advising the latter to cut the callous extravaganza and streamline their management. However, the
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