State-owned airlines; disappearing around the globe

Wednesday, 8 November 2023 00:00 –      – 89

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Pakistan’s Government has disclosed privatisation plans for its debt-laden national carrier, Pakistan International Airlines (PIA). The announcement comes after Islamabad agreed in June to fiscal consolidation plans as part of a $ 3 billion IMF bailout. PIA spokesperson Abdullah Hafeez Khan was quoted to have told the media that the PIA was incurring billions of rupees in losses.

Pakistan’s arch rival, India too divested its Government-owned flag carrier – Air India in 2022, and it was acquired by the famous Tata Group. The airline had been a huge burden to India’s taxpayers, and it had received a subsidy worth $ 4.5 billion since 2012 from the Indian Government. The Central Governments withdrawing from running airlines is nothing new; rather it is a worldwide phenomenon as such airlines incur heavy losses while consuming a colossal amount of public funds. In such a context, Sri Lanka was perhaps the only State that took over a privatised airline back to Government ownership during 2008 in a ludicrous move, and what is more, displaying sheer foolhardiness, the Rajapaksas formed a budget airline called Mihin Air – which was thankfully closed down by the Sirisena-Wickremesinghe Government.

The airline industry is a sector in which even private enterprises struggle to remain profitable. Ansett Australia and Kingfisher were among those reputed private-owned airline companies that went bust. The legendary investor Warren Buffet once remarked: “The airline industry’s demand for capital ever since the first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.” Due to a multiplicity of reasons, the airline industry is synonymous with ongoing losses and insolvency.

The industry is characterised by intense competition, high operating costs, and external factors that can significantly impact profitability. Air travel is constantly vulnerable to external factors like fluctuations in fuel prices as well as economic recessions and geopolitical risks like terrorism and wars. In the recent past, they have increasingly been affected by natural disasters and pandemics too.

Another serious challenge for the sector is the high capital requirements and operating costs. Airlines require significant investments in aircraft, maintenance and infrastructure, which can put a strain on cash flows and balance sheets. Also, the carriers are subject to high fixed costs like labour and fuel, making it difficult to adjust to changes in terms of demand and pricing. Ultimately, all such circumstances lead to airlines having to operate with low margins or even losses, making it challenging to achieve a satisfactory return on investment.

When the management of a business of such a high-risk, demanding industry engages in corruption, mismanagement, and poor decision-making as in the case of SriLankan Airlines post-nationalisation, financial collapse is a foregone conclusion. At last, the Government has invited bids to divest the beleaguered entity. The exact modalities of divestment have not been disclosed yet; however, it would be in the best interest of taxpayers if the Government gives up its majority stake. Many high-profile airlines in the world such as Qantas, Lufthansa, Turkish Airlines, and Air Canada were transferred to private ownership from State control, and there is no reason why Sri Lanka too should not follow suit.

Some nationalists claim that the Government should own an airline for national pride. Maintaining an air service which suffers heavy losses, swallows hardworking taxpayers’ money, and is rarely punctual is definitely not a pride, instead it is a national curse. There are some who point to the success of Singapore Airlines in which the Government owns a majority stake and ask the question why the same cannot be replicated in this land? We need to bear in mind that Singapore is a nation based on meritocracy and Confucian ethos with hardworking and progressive-minded citizens which is in stark contrast to the regressive values and views prevalent among the majority of people in this country.