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<p>MIAMI UNIVERSITY The Graduate School</p> <p>Certificate for Approving the Dissertation</p> <p>We hereby approve the Dissertation of Arijit Mazumdar</p> <p>Candidate for the Degree: Doctor of Philosophy</p> <p> Director (Dr. John M. Rothgeb, Jr.)</p> <p> Reader (Dr. Venelin I. Ganev)</p> <p> Reader (Dr. Abdoulaye Saine)</p> <p> Graduate School Representative (Dr. Daniel K. Gladish)</p> <p>ABSTRACT</p> <p>DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENTS POLICY, RATIONALE AND STRATEGY</p> <p>By Arijit Mazumdar</p> <p>Three decades after it nationalized its airline industry, India began to ease restrictions in 1986. This study examines the factors that motivated the government to deregulate the industry. It documents the changes in the regulatory system and analyzes the rationale and strategy behind the policies adopted by the government. Based on results from interviews conducted with government officials in Indias civil aviation ministry, it is concluded that although the factors that motivated the government to deregulate the airline industry include the desire to promote economic development, improve air services and the international trend towards liberalized airline competition, the governments determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics.</p> <p>DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENTS POLICY, RATIONALE AND STRATEGY A DISSERTATION</p> <p>Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science</p> <p>by</p> <p>Arijit Mazumdar Miami University Oxford, Ohio 2008</p> <p>Dissertation Director: Dr. John M. Rothgeb, Jr.</p> <p>TABLE OF CONTENTSList of Tables..iv List of Figures..v List of List of Abbreviations.vii Glossary of Termsviii Dedication..xi Acknowledgementsxii</p> <p>Chapter One Introduction.1 Research Objectives.1 Deregulation of Air Transport Services in India..2 Research Question...4 Literature Review.5 Hypothesis..13 Research Methodology..15 Organization of Study19</p> <p>Chapter Two Evolution of the Airline Industry in India.21 Introduction21 Historical Landmarks in Indian Airline Industry...22 Regulation of the Airline Industry in India25 Factors responsible for Deregulation of the Airline Industry in India...38 Deregulation of the Airline Industry in India49 Problems associated with Deregulation of the Airline Industry in India...71 Summary and Conclusion..73</p> <p>Chapter Three Deregulation of the Airline Industry in India: Conditioning factors..75 Introduction75 Established Practices and Procedures in the International Airline Industry..75</p> <p>ii</p> <p>National Security and Safety.98 Political Culture of India..103 Summary and Conclusion109</p> <p>Chapter Four Government Rationale and Strategy for Deregulation of the Airline Industry in India.111 Introduction..111 Organization of the Airline Industry in India..111 Interview Results.116 Summary and Conclusion130</p> <p>Chapter Five Conclusion..132 Deregulation of the Airline Industry in India..132 Indias Experiences: Some Observations and Recommendations...140</p> <p>Appendix A..147 Appendix B..151</p> <p>References....152</p> <p>iii</p> <p>LIST OF TABLESTable 1: Five-Year Average Profits of Air-India and Indian-Airlines..31 Table 2: Declining returns for Indian Airlines 1988-89 to 1993-94..32 Table 3: Share of Indias Carriers in Indias International Traffic34 Table 4: Growth of Capacity at Air India, 1980-1991...36 Table 5: Air Indias Rankings among IATA Airlines...37 Table 6: Growth in Indias air traffic (in millions), 2007-2017.46 Table 7: Market share of Airlines offering Domestic Scheduled Air Services in India, 2006..57 Table 8: Number of Passengers traveling (in millions) during 2006, First Quarter-Fourth Quarter.58 Table 9: Profits for Indian Airlines, 1995-96 to 1999-2000..61 Table 10: Financial Performance of Air India, 1995-96 to 2001-02.63 Table 11: Air services to and from key markets (2005-2006)...80 Table 12: Air Services Agreement between India and France, 23rd February 2005..82 Table 13: Air Services Agreement between US and India, 14th April 2005..83</p> <p>iv</p> <p>LIST OF FIGURESFigure 1: Growth in Indias air traffic (in millions), 1996-2007...45 Figure 2: Bilateral Air Services Agreement and India..79</p> <p>v</p> <p>LIST OF APPENDICESAppendix A: Questions for Deregulation of Airline Industry in India Survey147 Appendix B: Organization of the Ministry of Civil Aviation, Government of India..151</p> <p>vi</p> <p>LIST OF ABBREVIATIONSAAI ASA ASK DGCA EU FDI IATA ICAO MOU NRI RPK UAE UK US WTTC Airports Authority of India Air Services Agreement Available Seat-Kilometer Directorate General of Civil Aviation European Union Foreign Direct Investment International Air Transport Association International Civil Aviation Organization Memorandum of Understanding Non-Resident Indian Revenue Passenger-Kilometer United Arab Emirates United Kingdom United States World Travel and Tourism Council</p> <p>vii</p> <p>GLOSSARY OF TERMSAir Service Agreement An agreement with formal treaty status between governments regulating the conduct of trade in international air services. It consists of a series of articles (or provisions).</p> <p>Alliance</p> <p>An agreement between airlines to cooperate in the provision or operation of some of their services on a route, or on a regional or global basis.</p> <p>Available Seat-Kilometers</p> <p>The total number of seats offered multiplied by the distance flown, used as a measure of air transport passenger capacity.</p> <p>Cabotage</p> <p>Provision of commercial domestic air services within a country.</p> <p>Codesharing</p> <p>The assignment of one airlines designator code (for example, AI for Air India) to a flight operated by another airline.</p> <p>Freedoms of the air</p> <p>Types of international aviation rights established under ASAs.</p> <p>Hub</p> <p>An airport that an airline uses as its base of operations and a transfer point for passengers.</p> <p>Interlining</p> <p>commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines.</p> <p>viii</p> <p>Intermediate rights</p> <p>The right of a carrier from one country to fly to another country via a third country.</p> <p>Load factor</p> <p>The number of passengers carried as a percentage of the number of seats available.</p> <p>Memorandum of Understanding</p> <p>An agreement between two parties.</p> <p>Non-scheduled airline</p> <p>Any air transport enterprise only offering air transport services to the public that are not performed according to a regular timetable.</p> <p>Open Skies agreement</p> <p>An agreement to remove restrictions on the ability of airlines to operate services between two countries.</p> <p>Revenue Passenger-Kilometers</p> <p>The number of paying passengers on an aircraft multiplied by the number of kilometers flown, used as a measure of air passenger travel services.</p> <p>Route</p> <p>An air service between two points of cities.</p> <p>Scheduled airline</p> <p>Any airline operating regular air services according to a published timetable.</p> <p>Scheduled services</p> <p>Flights listed in a published timetable and performed for remuneration.</p> <p>Substantial ownership</p> <p>All or majority ownership of an airline by</p> <p>ix</p> <p>citizens in country of registration.</p> <p>Tariffs</p> <p>The prices to be paid for the carriage of passengers, baggage, cargo (excluding mail) on scheduled air services.</p> <p>Yield</p> <p>Airline revenue per unit traffic. Passenger yield is airline revenue per passenger kilometer.</p> <p>x</p> <p>DEDICATION</p> <p>To my parents and Suma</p> <p>xi</p> <p>ACKNOWLEDGEMENTSFirst of all, I want to thank my advisor, Dr. John M. Rothgeb, Jr. His help, guidance, and patience were indispensable when writing this dissertation. I would also like to extend my sincere appreciation to my dissertation committee members, Dr. Venelin I. Ganev, Dr. Abdoulaye Saine, and Dr. Daniel K. Gladish.</p> <p>Next, I would like to express my gratitude to the Department of Political Science, Miami University, Ohio, for the opportunity to complete my doctoral studies here. In addition, I want to thank the Graduate School of Miami University, Oxford, Ohio, for awarding me a dissertation scholarship for the Spring Semester 2008, and a dissertation support award, which allowed me to carry out this project.</p> <p>For their willingness to be interviewed, I gratefully acknowledge government officials in the Ministry of Civil Aviation, Government of India, who will go unmentioned here. They clarified many matters for me concerning civil aviation in India during our discussions.</p> <p>I would like to thank my parents for their love and support throughout the years and for always having faith in my abilities.</p> <p>My deepest gratitude is reserved for Suma who has been a source of love, patience, kindness and inspiration to me. Without her constant support and encouragement, this work would not have been possible.</p> <p>xii</p> <p>CHAPTER ONE IntroductionResearch Objectives For three decades until the mid-1980s, India heavily regulated its airline industry. It restricted foreign and private domestic commercial airlines from operating scheduled services within the country, while the state-owned domestic air carrier Indian Airlines enjoyed a monopoly. This was in keeping with the countrys socialist-oriented approach towards economic development, which restricted private sector participation, foreign trade, and foreign direct investment. However, since the early-1990s, as part of a broader economic liberalization agenda, India has been in the process of opening up its civil aviation sector, including the airline industry, to private domestic and foreign players. The purpose of this study was to examine the factors that motivated the government to deregulate the airline industry. This study is significant because deregulation of the airline industry in India is intimately associated with issues like the changing structure of the economy (transition from a planned economy to a liberalized economy), the role of foreign players (to what extent should foreign players be allowed to participate in the airline industry) and ownership issues (who will have ownership of the state-owned air carriers, the airports, the private domestic carriers, etc.). The issues associated with the deregulation of the airline industry are political in nature not only because they affect the economic growth and development of India, but also because such policy changes create an arena where different interests, having different priorities, compete with each other to maximize their relative gains. Unlike the case in Eastern Europe, where countries not only transitioned from a socialist economy to a free-market economy but also transitioned from communism to democracy, in India the liberalization of the economy was not associated with a concurrent change in the political system. This makes India a unique politicoeconomic case. The study of the deregulation of the airline industry in India also represents an excellent case for investigating the expanding role of markets, private capital, reform of 1</p> <p>state-owned enterprises, bureaucratic reorganization, decentralization, and globalization. This study provides valuable insights into factors that are critical in attracting foreign investment for a developing country that is liberalizing its economy. Finally, this study is significant because little detailed academic work has been done on civil aviation in India. The study of deregulation of air services in India has received virtually no attention in the academic field. This study addresses this gap and makes a modest contribution in this area because it considers civil aviation, particularly the deregulation of the airline industry, an important element in the liberalization of the Indian economy. This chapter opens with a brief discussion on the deregulation of the airline industry in India and situates the significance of the research within the context of existing scholarship on deregulation and privatization of economies around the world. The literature review explores one of the most controversial subjects in international political economy deregulation and privatization of economies and the role and impact of private domestic and foreign players in this process. After offering a hypothesis to the research question, a description of the research methodology and data gathering techniques employed for this study is presented. The chapter concludes with the plan of organization for the study.</p> <p>Deregulation of the Airline Industry in India Less than two decades ago, there were only two airlines offering scheduled air services in India: Indian Airlines, for domestic travel, and Air India, for international travel. Independent Indias first elected government established the two airlines in 1953 by acquiring and consolidating several private commercial carriers offering scheduled air services. Private commercial airlines offering scheduled services would not emerge again until 1994, three years after Indias eleventh elected government eased barriers to private sector participation, foreign trade, and foreign direct investment in the countrys economy. The Air Corporations Act of India, 1953, which had established Indian Airlines monopoly in domestic scheduled services, was repealed in 1994. This allowed private domestic commercial airlines to operate scheduled services within the country.1 Some of the other significant developments that were undertaken during that time by the1</p> <p>See Air Corporations Act, 1953. Directorate General of Civil Aviation, 2007a.</p> <p>2</p> <p>government included inviting private participation in the development of airport infrastructure and modernization of the air traffic system. Part of the reason for opening up the airline industry was the increased demand for domestic air travel. This trend has continued till the present. In recent years, air traffic to and from India has been among the fastest growing in the world. For example, the number of passengers traveling by air within the country has increased by 46.5 % during May 2006 (5.85 million) as compared to the same period in the previous year (4 million). Similarly, the international passenger traffic handled by Indian airports during May 2006 has registered a growth of 15.7 % to reach 1.99 million passengers, up from 1.72 million during the same period in the previous year (Phadnis, 2006). This rapid growth of air traffic led to increased consumer demand and expectations. Keeping pace with such demand required India to modernize and develop its civil aviation sector through measures that included liberalizing air transport services and attracting private domestic and foreign investment. Since the early-1990s, when the government began deregulating the airline industry with the passage of the Air Corporations (Transfer of Undertakings and Repeal) Act, 1994, several private domestic commercial airlines have been established.2 T...</p>