How many airlines do we need?

On July 31, the private airlines decided to take a day off on August 18, a decision that has been subsequently put on hold.
A few days earlier, Mr Vijay Mallya, Chairman of Kingfisher Airlines, plaintively asked during a TV chat , “If the Government can bail Air India out, why not the private airlines?” The anchor should have replied, “Because the Governm ent does not own them.” But he didn’t.
This brings up the central issue regarding the airline business: how many airlines can the Indian market support?
Indeed, this is the central question before the global aviation business: how many airlines can the world market support?
The answer lies in the basic microeconomic theory, especially the bit that is applicable to perishables, which is what airline seats are. In purely economic terms, the market for them is the same as that for fish.
The market structure also makes a huge difference. In perfectly competitive markets, such as agriculture, the producer cannot affect the price by varying his output. In a perfectly uncompetitive market, that is a monopoly, he/she can fix the output and charge whatever price he/she wants — high or low.
Globally, the airline industry falls somewhere in-between, but closer to the perfectly competitive model, rather than the monopoly one. This has resulted in the average decadal return on investment over the last 50 years, by all airlines, amounting to no more than about 1.5 per cent.
04/08/09 Ashwini Phadnis/T. C. A. Srinivasa-Raghavan/Business Line

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Categories: Indian Aviation- In General Aug 2009