How the Air Corporations Act, 1953, came to haunt Indian aviation

The 1950s – 1960s were considered the Golden Age of Flying. It would be fair to say, however, that despite this perception, airlines around the globe were on a slippery slope. Only the affluent could afford to fly. Statistically, the number of crashes and flight accidents pointed to the need for enforcing stricter safety measures.    

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India was no exception to this rule. To rescue the country’s airline sector and for making air services available to all, the Planning Commission of India recommended the merger of all scheduled airlines. The result was the nationalisation of Air India through the passing of the Air Corporations Act, 1953. 

The legislation nationalised all air transport and provided for the establishment of air corporations to facilitate the acquisition of existing airline companies and to improve operations of air transport services.  

The two corporations set up were Indian Airlines and Air India International. The move was aimed at providing safe, efficient, adequate, economical and smoothly coordinated air transport services, both internal and international.

Of far-reaching import, the new legislation made the business of running airlines by private institutions, illegal. 

Clearly, the government had undermined the benefits of giving any role to private institutions, who minimise transaction costs, reduce uncertainty, create markets by protecting property rights, uphold the rule of law, enforce contracts, regulate/ substitute markets in the case of market failures and stabilise markets by promoting economic stability. Economic entrepreneurs seek profits and therefore seek to create value.

The new legislation also paid scant attention to the fact that the government is as vulnerable to problems that crop up during the running of companies, as private markets. There was the need to compare the likelihood and extent of government failure against the likelihood and extent of market failure – with the benefit of hindsight, it may not be incorrect to suggest that the dangers of government failure are often greater than market failure. 

Additionally, the new law was pitted against the basic tenet of sound public policy – that a programme should enhance choice, freedom and competition.

The Air Corporations Act, 1953, gave monopoly powers to Indian Airlines to operate on domestic scheduled services, keeping out any other operator. Similarly, Air India International became the lone Indian carrier to operate on international routes except for flights to some neighbouring countries, which were given to Indian Airlines.

The implementation of the Act was itself a testimony to the government’s lack of awareness, that its involvement in an industry about which it knew little, was going to make matter worse – perhaps even worse than imperfect markets.

Founded in 1932 by the doyen of the Tata Group, JRD Tata, Air India was the umbrella under which all other domestic air carriers sought their place. Despite his role as founder, JRD had no illusions that nationalisation would not help in setting up an efficient and self-supporting air transport system. 

All along, JRD Tata did not lose sight of the fact that the government’s inexperience of running an airline industry, coupled with nationalisation and its perils namely bureaucratic sloth and lethargy (pointing to the government’s limited knowledge and benevolence), could lead to a decline in employee morale and fall in passenger services.

And that is the way it panned out. Much later, in 1994, when the Air Corporations (Transfer of Undertaking & Repeals) Act was legislated, it brought private commercial airline carriers back into the aviation sector. 

The Act provided for the transfer and vesting of the undertakings of Indian Airlines and Air India and repealed the Air Corporations Act, 1953, allowing private airlines to operate services to other countries and renegotiate bilateral air service agreements. It also eased regulations for airport construction and modernisation by allowing public-private partnership in construction and operation.

The Act realised that economic development needed institutions that encourage enterprise and the rules set should encourage competition and reduce barriers to entry while being generally applicable.

With private players coming into the fray, Air India’s domestic passenger market share came down to an all-time low of 11.8% in September 2018, as compared to 19.8% in January 2014, and has been on a continuous decline ever since. 

In 2000–01, attempts were made to privatise Air India. The beginning of the tailspin, yet again, coincided with governmental interference. On 23 May 2001, the Ministry of Civil Aviation charged Michael Mascarenhas, the then-Managing Director of Air India, with corruption, proving that players in the market and the government were equal when it came to promoting self-interest.  

In 2007, Air India and Indian Airlines were merged under Air India Limited. The merger, finally, initiated its downhill slide. The combined losses for Air India and Indian Airlines in 2006–07 were over ₹770 crore (US $110 million), which after the merger, rocketed to ₹7,200 crore by March 2009. 

By March 2011, Air India had accumulated a debt of ₹42,570 crore and an accumulated loss of ₹22,000 crore and sought ₹42,920 crore from the government. 

A report by the Comptroller and Auditor General (CAG) put the blame on the decision to buy 111 new aircraft and the ill-timed merger with Indian Airlines, as reasons for the poor financial health of the airline. 

In 2017, the Narendra Modi government gave an in-principle approval to the disinvestment of Air India. NITI Aayog, the government’s think tank, suggested complete privatisation of the Air India, which had a staggering debt burden of over Rs. 52,000 crores. In March 2018, the government issued Expression of Interest (EOI) to sell stakes of Air India, Air India Express and of AISATS, a ground handling joint venture with Singapore Airport Terminal Services (SATS). 

But no private firm showed the least interest in buying a debt-laden airline. Having failed on previous occasions to sell the airline, the government decided to sell 100% shares.

On 27 January 2020, it released the EOI to invite bidders deciding to sell 100% shares of both Air India and Air India Express as well as 50% shares of AISATS, after it had already decreased nearly ₹30,000 crore (US$4.2 billion) of debts and liabilities in a Special Purpose Vehicle (SPV).

Experts attribute this precipitous decline to excessive government interference. Consider the following: 

** The ban on recruitment ensured there were no fresh blood or new and innovative ideas. 

** The stress on tendering procedures coupled with overindulgence of vigilance setups that rarely differentiate between mala fide and procedural mistakes.

** Reluctance to address issues relating to leadership, human resource, processes, delegation and organisational culture. 

Given this tumultuous six-decade-old background, privatisation seems to be the only possible solution for the airlines to stay afloat, as only a healthy competition in a private market will balance itself in the longer run (the concept of Invisible Hand). 

While implementing a policy, the government needs to consider long-term consequences rather than short term effects. As a rule of thumb, it needs to focus on measurable outcomes and not just good intentions or inputs.

It is time for the government to impose stricter norms for itself and private stakeholders alike through a proper regulatory framework by laying down clear objectives, enumerated powers of the agents, extensive procedural details on the working of the agency and elaborate accountability mechanisms.

Look at it any way, there is urgent need to include more private players on the Board of the Airport Authority of India (AAI). Currently, the 11-member AAI Board includes mostly bureaucrats, who have little stake in making a private airline carrier part of an industrial decision-making process. 

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