Written by Lau Zheng Zhou,Research Manager of IDEAS
On 27 January 2020, India’s government made yet another announcement to privatize ailing national carrier Air India. The state-owned enterprise (SOE) was last put for sale through an auction in 2018, but no company expressed interest to bid.
This renewed attempt at privatization is motivated by Prime Minister Narendra Modi’s drive to balance the budget and revitalize the industry. As a result, some 23 SOEs have been identified for sale, including manufacturers in cement, scooters, solar cell as well as Air India who has not been particularly popular among buyers.
Another national carrier that is slated for privatization is the 72-year-old Malaysia Airlines (MAS), a wholly-owned entity by Khazanah Nasional. Prime Minister Dr Mahathir Mohamad has repeatedly signalled his intention to divest assets that do no play a “core role” to nation-building. But it is uncertain if this includes the airline.
Dr. Mahathir was also reported to have given MAS three options– to continue operations through further capital injection, privatize or to cease operation altogether. But without communicating an overall divestment plan (at least Modi has a list), speculation abound about the fate of MAS and other government-linked companies (GLCs). Conversations have since skewed towards alleged state capture and not enough about the implications of divestment to the broader socio-economic and industrial development.
Perhaps the one question that begs answering is whether there is a business case for the government to continue owning an airline.
Despite the International Air Transport Association (IATA) predicting strong growth for the aviation sector in both countries, airline operators have found themselves competing in an increasingly over-crowded marketplace. Consider the AirAsia Group, its revenue growth in third quarter last year was double-digit on the back of strong domestic and regional passenger demand. Yet, the traffic increase was still catching up with the pace of expansion in capacity as well as rising operating expenses.
Keeping state-owned airlines artificially afloat could distort regular functioning of the market and compel competitors to respond in less than efficient ways.
For example, in order to defend market share, airfare prices would be depressed, thus dragging profitability of operators across the board. Competitors may also put on hold plans to allocate more resources to improve operation efficiency and consumer experience, say through digitalisation, in order to achieve short-term gains.
Of course, consumers would welcome the prospect of lowering flying expenses, but there is an underlying difference between productivity-driven competition and cut-throat price wars which is not only sustainable but also threaten long-term development of the industry.
If propping up loss-making airlines means introducing costly inefficiencies to the industry, often at the expense of taxpayers, then why would not government sell them off much earlier?
The value of pride that these national champions elicit often goes beyond economic logic. Already, there are criticisms being levelled against this and other privatization attempts. In the case of Air India, Modi’s government has been accused of selling the “valuable” asset to benefit business interest group.
A senior upper-house member from Modi’s own BJP party had also threatened to bring the issue to the court.
Similarly, public sentiment is not straightforward on the MAS question and the Pakatan Harapan government seems reluctant to make its position clear. But it is imperative for the government to do so now since it was revealed that fellow competitor AirAsia had submitted a merger proposal to Khazanah Nasional.
The potential merger opens up questions on possible monopolistic behaviour impacting the overall market competitiveness as well as the seemingly inevitable job shedding needed to achieve organisational synergy.
But contrary to popular belief, some recent divestment of state enterprises has proven to be effective in giving these national champions a new lease of life.
In less than three years after Proton was partially acquired by China’s Geely, the erstwhile struggling automaker has made a strong comeback where it has launched competitive products at breakneck speed. The partnership with Geely has also allowed Proton access to cheaper component suppliers as well as the means to penetrate into new markets. So would privatization of national carriers lead to similar outcome?
The one advantage that MAS has over Air India, at least in the eyes of prospective buyers, is Malaysia’s relative ease of doing business. Foreign investors would be mindful of India’s overall high tax structure and also import charges leading to maintenance and repair of aircrafts, often requiring foreign parts, being carried out in other countries. Interest from foreign investors, in addition to domestic ones, would also enlarge the would-be buyer pool, thereby giving the government more bargaining power. But, in return, both the government and carrier must ready themselves to accept significant organizational transformation, if a deal is to be concluded.
This will then become a question of political will to undertake reform.