Open Skies” in India - Is it succeeding

Abstract

With a “middle class” of 200 million people in a large country where travel between the major population centres by surface transport can be arduous, India has a potentially large domestic airline market. In the post-World War II period, India nationalised its airline industry into one international carrier, Air India, and one domestic carrier, Indian Airlines, but it began to relax these controls in 1986. Since then, a series of policy initiatives introduced what is proclaimed to be an “open skies” policy. There has been no shortage of new entrants willing to add capacity into a system where supply-side constraints are regarded as the main impediment to a boom in airline travel. However, many of these new ventures have failed within a few years and the remaining carriers, including Indian Airlines, have had to increase fares in an attempt to improve their financial performance. Far from being an “open skies” environment, airline managers continue to be subject to formal and informal government regulations and government has introduced new taxes and increased charges for aviation services. The result is an industry characterised by financial instability and low traffic growth. This paper documents the changes in the regulatory system and analyses the strategies adopted by the airlines. The paper concludes that inappropriate policies are constraining development of the industry, particularly the requirement imposed by the Government for the airlines so allocate their capacity on a mix of profitable and unprofitable routes. Paper presented at the First Conference of the Air Transport Research Group Meeting, University of British Columbia, Vancouver B.C., Canada, 25-28 June 1997. The ATRG is a Special Interest Group of the World Conference on Transport Research Society.